Tax Credit and Deductions
With the passing of the SECURE Act in December 2019, increased tax credits mean there’s never been a better time to start a retirement plan. Now, you can offset up to $5,500 of plan costs per year for the first three years, up from $500 per year—that’s up to $16,500 of savings!
The tax credit can offset up to 50% of annual eligible costs to run the retirement plan. That includes fees for administration, recordkeeping, advising, setup, and even employee education. Here is how the tax credit is calculated:
The greater of $500, OR $250 for every eligible non-highly compensated employee
Not to exceed $5000 or 50% of total eligible plan costs
Bonus tax credit of an additional $500 per year for plans that add automatic enrollment
Use IRS Form 8881 to claim the tax credit and deduct it from your total federal taxes owed. As for the remaining fees paid by the employer? They are business expenses that reduce taxable income.
Here’s an example of a new retirement plan’s costs for a plan of with 10 participants:
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