Do you have a retirement plan? You should. Investing in your future is the best way to ensure you will be comfortable after retirement. Today we’ll be talking about the benefits of consistent pre-tax investing as a way to make this dream a reality. We’ll also cover some additional ways to shore up your retirement fund and relieve some of your future tax liability.

The Power of Pre-Tax Investing

So, what makes pre-tax investments so powerful? It’s right in the name. When making pre-tax investments into a retirement account, such as a 401(k) or SIMPLE IRA, you get to defer money from your W-2 wages to your retirement account before they’re even taxed.

While you may be taxed on your future distributions, having more money to invest in the beginning usually means more growth and a higher account balance over time. Plus, most people find themselves in a lower tax bracket during retirement, so the taxes taken out upon distribution tend to be lower than if they were taken out of the original contribution.

Benefits for Business Owners

The benefits of pre-tax investing extend even further if you own and operate your own business. S corporations are preferred here as they can also avoid paying self-employment taxes.

What Is a SIMPLE IRA?

SIMPLE IRA plans are available to small businesses with less than 100 employees and can provide a significant source of income for retirement.

Key Features

These plans offer several advantages:

  • No startup or operating costs like conventional retirement plans
  • Easy to establish with no additional filing requirements
  • 100% vesting: Employees are always 100% vested in all funds available

Important Requirements

However, there are some requirements to note:

  • Employers cannot have any other kind of retirement plan available
  • Employers are required to either:
    • Match each contribution up to 3% of compensation, OR
    • Provide a 2% non-elective contribution for each eligible employee

How It Works: An Example

Let’s run through an example with an S Corp:

Any W-2 wages you pay yourself are tax-deductible for your business along with the business’s half of the payroll taxes. Normally, these wages are still taxed at the individual level on your 1040 based on the amount in line one of the W-2.

Now, let’s say your business has $16,500 left in net profit around the end of the year. Luckily, this is the 2025 limit for SIMPLE IRA contributions.

Instead of letting this amount get fully taxed, you can:

  1. Pay yourself the $16,500 through your W-2
  2. Defer it to your SIMPLE IRA
  3. Keep the money for the future

With this system in place, you can pay yourself the net income of your S corporation, saving it for the future, but showing zero income on line one and avoiding all taxes.

2025 Contribution Limits

For 2025, the contribution limits are:

  • Standard contribution limit: $16,500
  • Catch-up contribution (age 50+): Additional $3,500 (total of $20,000)
  • Super contribution (ages 60-63): Additional $1,750 (total of $21,750)

Thanks to the Secure 2.0 Act, plan participants aged 60 through 63 can be eligible for this additional super contribution.

Balancing with Post-Tax Investing

While the core focus of this article is pre-tax investing, we would be remiss if we didn’t talk about some post-tax investing that can be used to balance out your retirement fund.

Roth IRA Contributions

You can make contributions to both a SIMPLE IRA and a Roth IRA without infringing on the other’s contribution limit. Each has a different contribution limit, allowing you to max out your SIMPLE plan before adding to the Roth.

Key Difference: Roth contributions are made post-tax, meaning you pay the taxes due at the time of contribution. This adds additional cushion during retirement as the Roth distributions are received tax-free, balancing out the taxed distributions from the SIMPLE IRA.

Important Note

Contribution limits are adjusted annually by the IRS for inflation and plan policies are subject to change as well. If you have any questions about this retirement strategy, please reach out to our office and we will be happy to assist.