A new tax bill was passed by both houses of Congress and signed by President Trump on December 22, 2017. All anyone has to do is turn on the TV or read a news headline to know this bill came with its fair share of complications and confusing rhetoric. Now that the dust has settled, it’s time to discuss one aspect of the new tax plan: how it will impact retirement for business owners.
This bill is different from many of its predecessors. It makes very few changes directly to retirement accounts. Those who followed the discussions about retirement plans during the creation of this tax bill know there were lots of ideas thrown around that could have had very bad implications for business owners. Fortunately, there were no major changes in the overall structure of qualified plans, including 401(k)s. Likewise, there were no reductions in the amounts that can be contributed.
According to the Ferenczy Benefits Law Center, the part of this bill that is likely to have the most impact on retirement plans is actually the taxation of owners of pass-through entities. “The real problem arises because personal income unrelated to business—which includes a distribution from a retirement plan or IRA—does not receive the deduction on business income, but is subject to taxation at the full individual rate.”
So what does this mean for the average business owner? They don’t just defer taxes by contributing to a retirement plan – they actually increase their taxes in the long run.
Fortunately, there’s still a plethora of reasons why a business owner would still offer and contribute to retirement accounts. For example, retirement accounts help attract and keep qualified employees. They also protect funds from creditors. Finally, a business owner would still reap the rewards of tax-free growth in this new plan. But the Ferenczy Benefits Laws Center warns, “Nonetheless, if a business owner’s main motivation for having a plan was his or her personal tax deferral and savings, the new tax structure for pass-through businesses acts as a disincentive to have a plan.”