This was another question I received at USTaxAid. It seems like a simple yes/no question and yet, the real answer is “It depends.”
Can you set up a pension for a new business? There are some questions that you need to consider first.
- What type of business structure does your new business have?
- If you have a Sole Proprietorship (Schedule C), do you have taxable income?
- If you have a Corporation, did you take a salary?
- Do you have other full-time employees?
In order to fund a pension plan from your business, there are several things you need to do.
- Set up the pension plan before year end.
- Make sure you cover all full-time employees.
- The pension contribution will be based on earned income. If you have a Sole Proprietorship, that means your pension amount will be determined based on the net income of the business. If it’s a loss, there can be no contribution. If you have a corporation, you will need to draw a salary.
A tax-deferred pension like a 401(k), SEP or SIMPLE give you a deduction against your current income. The income earned in the pension is tax-deferred. It becomes taxable as you take distributions from the pension later.
A Roth pension does not receive a tax deduction. The income grows tax free. Later, when you take out distributions, they are not taxable.
As far as whether you can set up a pension plan for your new business. The simple answer is “yes.” But, should you? That will depend on other factors.