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Using Retirement Plans for Tax Deduction Before the Deadline

Using Retirement Plans for Tax Deduction Before the Deadline

| January 17, 2024

Are you a small business owner or independent contractor looking for last-minute tax deduction opportunities? It’s still possible to explore ways to reduce taxable income using retirement plans.

The SECURE ACT, implemented in 2019, brought about significant changes, particularly in employer retirement plan contributions. The most notable change was the contributions deadline being extended from the end of the calendar year to the tax filing deadline.

This simplifies the process for employers looking to adopt retirement plans, allowing them to have a clearer understanding of their business performance and cash flow before funding such plans.

The change also allows small business employers, including the self-employed and independent contractors, greater flexibility in managing and optimizing their contributions based on their financial circumstances and business performance.

Here are three retirement tax plans to consider if you’re on a last-minute tax deduction hunt.


You can defer up to 25% of your employees' taxable income with the SEP IRA. Because you’re a business owner, your limit extends to 20% of your taxable income, capped at $66,000 — the defined contribution limit for 2023. In practical terms, a self-employed individual with a $300,000 income, after business deductions, could potentially reduce their taxable income to $240,000. This could be a solid solution for those with no additional employees but may prove to be too generous for a business with many employees.

401(k) or Profit-Sharing Plan (PSP)

The flexibility of a profit-sharing contribution is particularly advantageous when you apply various actuarial methods, such as the PSP (cross-tested or new comparability methods). The PSP approach allows you to group employees, providing the flexibility to tailor the plan based on age or income levels. An actuary can help you design the most effective PSP arrangement that aligns with your business's valuation and goals. In a typical situation when a profit-sharing contribution would be recommended, the calculation would allow the owner to receive the majority of the tax-deferral while rewarding all or most of the other employees with some additional tax-deferred compensation as well. A win-win for everyone looking to add to their retirement nest egg.

Cash Balance Pension

The Cash Balance Pension (CBP) is similar, in some ways, to the PSP. Again, you’ll need an actuary to assess its benefits for you and your business. CBP provides substantial tax deferral advantages compared to a 401(k) plan or SEP. In a CBP, contributions are age-weighted, allowing older business owners to contribute significantly more than younger employees. CBPs often permit higher contribution limits than 401(k) plans or SEPs as well. It’s worth a conversation if this demographic fits your company.

Find The Most Suitable Retirement Plan for Tax Deductions Today

For employers seeking ways to reduce taxable income, it’s not too late to explore diverse retirement plans. Not every available option is favorable for your business. SEP IRAs allow substantial income deferral, while Profit-Sharing and Cash Balance Plans provide tailored solutions that work best under specific circumstances.

Remember, you may have to use actuarial methods to optimize contributions. A member of the SKG team can help you employ all tools necessary to make informed decisions, ensuring tax-efficient retirement planning that aligns with your business goals and help maximize benefits.

Neither MML Investors Services nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters CRN202701-5744253