The time is upon us for an end-of-year tax review, but a retirement savings review too? Absolutely!

As Autumn nears and the end of the year inches closer, many people take a look at their tax situation year-to-date to see what they might expect to owe come tax filing season next year. They want to see if there is anything that they can do to improve their situation and reduce their tax liability in a compliant way before time runs out, because after December 31st, there aren’t many options available.

Many people forget, however, that this is also a good time to do a retirement savings check-up and ensure that they’re contributing all that they can, per their financial situation, to maximize their savings rate for the year.

While these may seem like two different tasks, retirement plans are tax-incentivized strategies to help people save for retirement by deferring their income tax liability. It becomes apparent that they should be reviewed in tandem when looking at how contributing to a retirement plan can affect their income tax liability and marginal and effective tax rates. (Case Study)

People who are concerned about a huge tax bill come next spring should consider a mid/end-of-year review with their CPA to discuss what their tax-planning options might be. The CPAs, in turn, might consider proposing that they contribute to a retirement plan, if they aren't already. For example, recommending a Self-Directed Solo 401(k) to their eligible nonemployer business-owner clients would not only provide them with high contribution limits and thus, greater tax-deferral savings, but also an increased retirement savings rate and breadth of asset class diversification.

It’s important that such a retirement/tax planning strategy be considered before the year ends, however. Even though the SECURE Act changed the Self-Directed Solo 401(k) plan establishment deadline from December 31st to the tax filing deadline, plus extension, those who are taxed as S- and C-corps must contribute the salary deferral portion of their contributions as it is earned, generally through payroll and within 7 days. So, that means that the plan must be established in time to earn the money that will be contributed, and then contribute it, before the end of the year (or the beginning of January for end of December payroll).

Being tax efficient and saving for retirement requires cohesive planning! That’s why it’s beneficial to review retirement savings goals, options, and annual contributions to maximize retirement savings while considering tax planning strategies.