New Retirement Planning Tax Credits

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Each year we get closer to our retirement, giving us less and less time to make sure we have plenty of money saved up for our golden years.

Retirement planning can be a very valuable tool when it comes to tax planning and wealth building. Here are some additional tax benefits:

Claim the Retirement Plan Start-Up Tax Credit

By creating a new qualified retirement plan such as 401(k), or defined benefit plan, a SIMPLE IRA, or a SEP, you may qualify for a non-refundable tax credit that is the greater of

  • $500, or
  • the lesser of:
    • $250 multiplied by the number of your non-highly compensated employees who are eligible to participate in the plan, or
    • $5,000.

The credit will be based on your business’s “qualified start-up costs,” which means any necessary expenses of an eligible employer that are incurred in connection with:

  • the establishment or administration of an eligible employer plan, or
  • the education of employees in regard to such plan.

$500 Tax Credit for New Automatic Enrollment

The SECURE Act introduced a non-refundable tax credit of $500 per year for up to three years, starting with the first tax year (2020 or later) in which you, as an eligible employer, can include an automatic contribution layout in a 401(k) or SIMPLE plan.

The $500 automatic contribution tax credit is in addition to the start-up tax credit and can apply to both new and existing retirement plans. Furthermore, you don’t need to spend any money to trigger the credit. You only need to add the automatic enrollment feature (which contains a provision that enables the employees to opt out).

Conversion to a Roth IRA

Consider converting your 401(k) or traditional IRA to a Roth IRA.

If you don’t need your IRA money during the next five years, then converting to Roth IRA can produce far better financial results compared to the traditional retirement plan.

You first question is: How much tax will you have to pay to convert your existing plan to a Roth IRA? This will provide an idea of your cash outflow allowing you to make a more informed decision.

Here are four reasons you should consider converting your retirement plan to a Roth IRA:

  1. You can withdraw the funds in your Roth IRA (the contributions only) at any time, without any tax consequences and penalties, because your contributions were already taxed in the year of contribution.
  2. Any withdrawal after five years of conversion will be tax free but if you make that conversion withdrawal within five years of conversion, then you will be subject to a 10 percent penalty.
  3. When you have a Roth IRA, then you pay no tax on qualified withdrawals, which are distributions taken after reaching age 59 1/2, provided you’ve held your Roth IRA for at least five years.
  4. Unlike the traditional IRA, you don’t have to take required minimum distributions from a Roth IRA after reaching age 72 or to put this another way, you can keep your Roth IRA untouched and let it earn money until you die.

If you would like some help with any of the above, please give us a call at 714-383-2307.