S Corporation Retirement Plans

S Corporation owners who work in the business as employees can participate in a company retirement plan just like any other employee, which provides a valuable opportunity to reduce taxable income while building long-term savings. Common retirement plan options for S Corporations include SEP-IRAs, SIMPLE IRAs, and 401(k) plans, and contributions are generally based on W-2 wages paid by the corporation rather than total business profits. A solo 401(k) allows the shareholder employee to make both an employee contribution of up to $23,500 per year and an employer contribution of up to 25% of W-2 compensation, which can result in total annual contributions of more than $70,000 for owners who are 50 or older. Because contribution limits are tied to wages, the level of your W-2 salary matters when calculating how much you can put into a retirement plan, which is another reason why paying yourself an appropriate salary is important. Setting up and consistently funding a retirement plan through your S Corporation is one of the most powerful and legal ways to lower your tax bill every year.