No Retirement Plan: Urgent Tax Savings

With no structured retirement plan, you're missing significant deduction opportunities and likely paying unnecessary self-employment tax. This guide covers immediate action items.

The immediate cost. If you earn $300,000 and contribute nothing to a retirement plan, you are paying federal income tax at your full marginal rate on every dollar. An employer 401(k) contribution of $23,500 would reduce your current-year federal taxes by roughly $8,200 at a 35% rate. A self-employed individual with a solo 401(k) or SEP-IRA could shelter $50,000 to $70,000, saving $17,000-$24,000 or more.

Self-employed options are fast to set up. A SEP-IRA can be established and funded as late as your tax filing deadline. A solo 401(k) must be established by December 31 of the tax year but can be funded until the filing deadline. Neither requires complex administration for a one-person business.

Compounding missed years matter. Each year without retirement plan contributions is a year of lost tax-deferred or tax-free growth. At high income levels, the combined value of the tax deduction today and decades of tax-deferred compounding is substantial.

The pitfall: The longer you operate at high income without a retirement plan, the harder it becomes to catch up. A CPA can identify the highest-impact plan for your situation and get it established before the current tax year closes.