How Tax-Advantaged Retirement Plans Can Reduce Taxes and Build Wealth Simultaneously

reading time: 19 minute(s)

Tax season is here, and if you’re like most small business owners, you’re juggling a lot—operations, customers, and day-to-day decisions. The last thing you need is a tax surprise in April. And with the added pressure of retaining your best people, tax season can feel overwhelming.

Here’s the good news: there’s a way to reduce your tax bill and make your team want to stay—simultaneously. It’s a strategic use of retirement plans designed specifically for small business owners like you. With TaxBandits partnership with WealthRabbit, this strategy becomes a simple reality: you set up a retirement plan, your employees build wealth, and your business gets real tax savings.

Why Retirement Plans Should Matter to You (And Your Business)

Let’s get one thing clear: if you’re not offering a retirement plan, you’re losing money and talent.

The Talent Problem

Employees want to work for businesses that care about their future. Research shows that 54% of small businesses with fewer than 100 employees don’t offer retirement plans, giving their competitors a leg up. Offering retirement benefits can help you retain talent, improve productivity, and boost employee satisfaction. It’s not just about business growth; it’s about keeping your team around for the long haul.

The Tax Advantage

Every dollar you contribute to a retirement plan is tax-deductible for your business. This means that by contributing, you immediately reduce your taxable income. If your business is profitable but facing a large tax bill, funding a retirement plan can reduce your taxes and help your employees build financial security.

The Common Misconception

Many small business owners think retirement plans are only for big corporations. But plans like SIMPLE IRAs and SEP IRAs are designed specifically for small businesses. They’re simple to set up, easy to maintain, and offer similar tax benefits to larger plans—without the complexity.

SIMPLE IRA vs. SEP IRA: Finding the Right Fit for Your Business

Both SIMPLE IRAs and SEP IRAs offer excellent benefits, but each suits different business needs.

SIMPLE IRA: When You Want a Team Approach

A SIMPLE IRA is ideal for businesses with fewer than 100 employees. Both you and your employees contribute to the plan.

• How It Works: Employees contribute via payroll deductions, and you can match their contributions (up to 3% of their pay) or make a flat 2% non-elective contribution for all employees.
• 2026 Contribution Limits: Employees can defer up to $17,000, with a $4,000 catch-up contribution for those over 50. Employees aged 60-63 can contribute up to $5,250 extra (under SECURE 2.0).

When It Makes Sense: Choose a SIMPLE IRA if you have a predictable cash flow and want employees actively involved in their retirement. It’s also great for building employee loyalty through regular employer contributions.

SEP IRA: When You Want Maximum Flexibility

A SEP IRA gives you, the employer, full control over contributions. Employees don’t contribute anything themselves.

• How It Works: You contribute up to 25% of an employee’s compensation, with contributions flexible based on business income.
• 2026 Contribution Limits: You can contribute up to 25% of compensation, with a maximum annual contribution of $72,000 per employee.

When It Makes Sense: Opt for a SEP IRA if your business income fluctuates. It’s perfect for businesses with seasonal or unpredictable revenue, or if you’re self-employed.

How You Actually Save on Taxes: Real Numbers

Let’s turn the theory into real numbers.

Scenario 1: SIMPLE IRA

You own a marketing agency with six employees and a $300,000 payroll. You set up a SIMPLE IRA and match employee contributions at 3%. If your employees contribute $8,000 each, you’ll match with $9,000.

• Tax Savings: That $9,000 is deductible, reducing your taxable income. At a 25% tax rate, this saves you $2,250 in taxes, totaling $11,250 in tax savings over five years.

Scenario 2: SEP IRA

You run a consulting firm with eight employees and a $400,000 payroll. You contribute 15% of employee compensation to a SEP IRA, totaling $60,000.

• Tax Savings: That $60,000 contribution is deductible, meaning you save $15,000 in taxes. Additionally, that $60,000 grows tax-free inside the account, meaning you won’t pay taxes on investment gains each year.

Tax Credits That Make This Even Better: SECURE 2.0 Benefits

The IRS offers tax credits to make setting up retirement plans even more beneficial. These credits directly reduce what you owe.

Startup Costs Credit: Eligible employers can claim up to $5,000 in tax credits for the costs of starting a SEP or SIMPLE IRA plan. This covers setup, recordkeeping, and employee education. If you have fewer than 50 employees, you can claim 100% of these costs.

Employer Contribution Credit: SECURE 2.0 introduced a tax credit for employers who make contributions to employees earning less than $100,000. You can receive up to $1,000 per employee per year, and the credit can be applied for up to five years.

Auto-Enrollment Credit: If you implement automatic enrollment in your plan, you can receive a $500 credit per year for up to three years.

The Bottom Line on Credits: If you have 25 employees earning under $100,000, and you’re matching contributions at 3%, you could potentially access $15,000 in tax credits over the first three years, plus additional ongoing credits. That’s real money that directly offsets the plan’s operating costs.

Setting It Up: Way Easier Than You Think

Setting up a retirement plan doesn’t have to be a hassle. With WealthRabbit, the process is streamlined and digital.

What WealthRabbit Offers:

• Fully Digital Setup: Skip the paperwork. With WealthRabbit, setting up a retirement plan takes just a few days.
• Payroll Integration: WealthRabbit integrates directly with your payroll system to handle deductions and contributions automatically.
• SECURE 2.0 Compliance: Stay up to date with the latest IRS requirements and credits.
• Employee Portal: Employees can track their contributions, change investments, and access educational resources.
• Expert Support: WealthRabbit’s financial experts are available for any questions you have about strategy, setup, or compliance.

The Real Impact: What This Means for Your Business

Setting up a retirement plan with WealthRabbit has a real impact on your business. Here’s what you get:

• Tax Savings: Reducing your taxable income year after year, plus credits that directly reduce what you owe.
• Employee Retention: Employees will appreciate that you’re investing in their future, boosting loyalty.
• Simplified Administration: The process is digital and automatic, saving you time and reducing the burden of compliance.
• Flexible Contributions: Control over contribution levels with SEP IRAs, or predictable obligations with SIMPLE IRAs.
• Employee Financial Security: Help your employees build long-term wealth with tax-deferred growth and matching contributions.

Your Next Step

Tax season doesn’t have to be stressful. With a retirement plan, you’re making a smart business decision that reduces taxes and helps retain your employees. Whether it’s a SIMPLE IRA or SEP IRA, TaxBandits and WealthRabbit are here to help you set it up and make it work for your business.