Can You Set Up a Pension For a New Business? | USTaxAid

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Can You Set Up a Pension For a New Business?

Written by Diane Kennedy, CPA on November 19, 2021

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. 

 

  1.    What type of business structure does your new business have? 
  2.    If you have a Sole Proprietorship (Schedule C), do you have taxable income? 
  3.    If you have a Corporation, did you take a salary?
  4.    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.

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