Tax Day is almost here and you may be encouraged to think about making a Traditional IRA
contribution for 2022. Depending on your adjusted gross income, these type of contributions can
reduce your taxable income by up to $6,000. If you’re over 50, and you qualify for that deduction, your
limit could be as high as $7,000.
In addition, an often-overlooked additional opportunity to build retirement savings and mitigate
current taxes is a Spousal IRA. For married couples that file a Joint return, an unemployed, or
underemployed spouse may still be able to contribute to an IRA for 2022.
For small business owners whose spouses work even part-time and have access to an employer
sponsored retirement plan such as a 401(k), the deductibility of Traditional IRA contributions goes away
once Modified Adjusted Gross Income (MAGI) exceeds only $129,000 for 2022. If your spouse does not
work, or works at an employer who does not offer a retirement plan, things are a little better but the
deductibility goes away at MAGI over $214,000 for 2022. Of course, you can make non-deductible
contributions to a Traditional IRA but those funds, plus all growth, are fully taxable upon distribution
which can seem less than ideal.
A common reaction to these facts is to consider a Roth IRA. If there’s no deduction for a
Traditional IRA contribution, why not instead put those funds into a Roth IRA and get better tax
treatment upon withdrawal in retirement? The bad news is that Roth IRA contributions (the ability to
add money, not get a tax break) is also stopped at MAGI over $214,000 for 2022.
If you are successful small business owner who finds themselves unable to benefit fully from
individual retirement accounts due to your income in 2022, you should consider the benefits of installing
a SIMPLE IRA in your business starting in 2023.
Employees in your business, including you, fund their accounts through payroll deduction.
These contributions can be made on a pre-tax basis, lowering your taxable income on each paycheck,
ensuring you get a tax benefit, up to contribution limits which can be roughly double those of the
individual retirement account limits. When possible, making your spouse an employee of the company
will allow contributions on their behalf as well, potentially increasing total retirement savings and
further reducing tax liability.
Some businesses have put off installing a SIMPLE IRA due to the cost of contributing on behalf of
their employees. Starting in 2023, employers can be eligible for a per employee credit for up to the first
four years of establishing a new plan and start up credits have been increased for businesses with up to
50 employees as well.
Brand new in 2023 is the availability of the Roth option in SIMPLE IRAs. Now small business
owners who would otherwise have been prohibited from contributing to a Roth style account will now
have that ability.
For a detailed discussion on how the limits and rules apply to your unique situation, feel free to
connect or message me for a complimentary 30 minute discussion.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings
from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being
opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions
may apply.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current
income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in
addition to current income tax.
The opinions voiced in this material are for general information only and are not intended to
provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We
suggest that you discuss your specific tax issues with a qualified tax advisor.