There's Still Time to Start a Retirement Plan, Reduce 2021 Taxes

What You Need to Know

The deadline to contribute to an IRA for any given year is the federal tax filing deadline for that year.
Under the Secure Act, small-business clients now have extra time to establish a 401(k) plan for the prior tax year.
Clients who contribute to their own SEP account must also contribute to the accounts of all employees for that year.

Now that we’re well into 2022, many clients have started to assess their tax picture more carefully for the 2021 tax year. For many small-business clients, the most pressing question may be whether they have any retirement planning options that could help reduce taxable income for the 2021 year.

Small-business clients generally have multiple retirement planning options — and, for some, it may be possible to establish the retirement plan even though 2021 is behind us. It’s important to play close attention to the details, however. Remember: While some retirement plan options remain, the deadline for others has already passed — and it remains important to evaluate each business’s situation before adopting a plan that could have lasting future implications.

Retirement Planning Options: Timeline for Establishing a Plan

As most clients know, the deadline to contribute to an IRA for any given year is actually the federal tax filing deadline for that year (this year, the federal tax filing deadline is April 18, 2022 for most taxpayers). Taxpayers can also take advantage of extensions — giving most clients until Oct. 15 to establish or fund the account. 

On the other hand, self-employed taxpayers must make elective deferrals to 401(k)s by the last day of the plan year (Dec. 31, 2021). Under a new rule created by the Secure Act, however, small-business clients now have extra time to establish a 401(k) plan for the prior tax year. Those clients now remain eligible to open a solo 401(k) and make employer contributions only  for the 2021 tax year (so, the client can contribute up to $58,000 in employer contributions for 2021). 

SEP IRAs are subject to the same deadline as traditional IRAs — meaning that the deadline is the business’s federal tax filing deadline (with extensions) and the client still has time to open and fund a SEP IRA for 2021. With extensions, the client could have until Sept. 15 or Oct. 15, 2022 to open the SEP IRA.

The deadline for establishing a SIMPLE IRA, however, is much earlier. Small-business clients had only until Oct. 1, 2021 (Oct. 1 of the year the plan became effective) to establish a SIMPLE plan for the 2021 tax year.