While there are a lot of best practices & strategies to take advantage of to help reduce taxes, if I had to boil it down to what I believe every entrepreneur can do, & should consider, there would be 4 tax strategies. Today I’ll kick off this series talking about #1: retirement contributions.
Why Retirement Contributions are Tax Gold:
Every dollar you contribute to a pre-tax retirement account reduces your taxable income today. If you believe you’re in a higher tax bracket today then you will be at retirement, this is an & strategy. As an example, if you’re in the 24% tax bracket today, a $1,000 contribution saves you $240 in taxes immediately. If you anticipate being in the 12% bracket at retirement, yes you’ll pay $120 in taxes when you withdraw the money, but a) you’re saving yourself $120 in taxes over your lifetime, and b) you’ve been able to either re-invest, or use, that $240 you saved over the past several decades
What are Popular Options:
As I mentioned in a prior post, there are a number of pre-tax retirement options out there:
- SEP IRA
- SIMPLE IRA
- Traditional IRA
- Solo 401(k)
- Traditional 401(k)
Personally, I love traditional 401(k) plans due to the amount of money they can allow you to put away. For 2025, the maximum employees can contribute from their paychecks to a 401(k) is $23,500, employers can contribute an additional $46,500 ($70,000 combined), and those over 50 can make an additional $7,500 catch-up contribution for those age 50 and over.
Strategic Approach:
As you meet with your advisor, make sure you’re considering:
- Calculate your maximum contribution based on your business structure
- Consider your cash flow – spread contributions throughout the year or make a lump sum
- Think about tax timing – traditional vs. Roth contributions based on current vs. future tax rates
- Don’t forget state taxes – retirement contributions often reduce state income taxes too (sorry fellow PA residents, no tax break for us when funds are contributed!)
The Bottom Line:
Retirement contributions can be one of the & tax strategies you can implement. Even if you do nothing else, make sure you’re taking advantage of this strategy!
A big thanks to Thomas Kopelman who inspired this series
Up Next: PTET Elections – Your State Tax Workaround