As the year winds down, business owners and individuals alike are focused on closing the books, preparing for tax season, and making smart financial moves before December 31. But before you flip that calendar page, take stock of what you can do to improve your tax bill for the year. One of the most effective strategies? Maximizing retirement contributions.
Ensign Partners is a consulting firm providing comprehensive legal, financial, accounting, insurance, and tax advice for business owners and professionals. Unlike other consulting firms, our services are coordinated to provide our clients with maximum visibility and control, ensuring that all strategies are lined up to support our clients’ success.
Our approach is to look at all the available tools to maximize business and personal financial well-being. One very effective tool is contributing to retirement accounts before year-end. This strategy builds long-term wealth and provides a powerful way to lower your tax liability this year. Here’s how it works, and what you should consider before the clock runs out.
The Dual Benefit of Retirement Contributions
Think of retirement contributions as serving two purposes at once:
- Immediate tax savings: Contributions to certain retirement accounts are tax-deductible, reducing your taxable income for the current year. That means a lower tax bill when April 15 arrives.
- Future wealth building: Contributions grow tax-deferred (or tax-free, in the case of Roth accounts), giving you more long-term compounding power.
This one-two punch makes retirement contributions one of the most tax-efficient moves you can make before December 31.
Options for Individuals
If you’re an employee or business owner paying yourself wages, here are the most common retirement savings vehicles available:
401(k)
- The contribution limit for 2025 is $23,000 (or $31,000 if age 50+).
- Contributions reduce taxable income today, and employers can match a portion of contributions.
- For 2025, total contributions (employee and employer) cannot exceed $70,000.
- There are no income limitations for being able to contribute to a 401(k).
- Employers must treat all employees fairly; special rules may apply for 401(k)s of certain Highly Compensated Employees.
Traditional IRA
- Contribution limit: $7,000 (or $8,000 if age 50+).
- Deductibility depends on income level and whether you (or your spouse) are covered by a workplace plan.
Roth IRA
- Roth IRAs have the same contribution limits as Traditional IRAs.
- While contributions are not deductible, qualified withdrawals, including investment growth, are tax-free.
- Roth IRAs are a strategic choice if you anticipate higher tax rates later.
- Be aware that there are income phase-outs for eligibility to contribute to a Roth IRA.
Options for Business Owners
Business owners have even more flexibility to maximize contributions and reduce taxable income:
SEP (Simplified Employee Pension) IRA
- Contribution limit: Up to 25% of compensation, with a 2025 cap of $69,000.
- Easy to set up and administer, making it an excellent option for smaller businesses.
Solo 401(k)
- Available to business owners with no employees (other than a spouse).
- Combines employee and employer contributions, allowing much higher limits than a standard 401(k).
Cash Balance Plans
- A hybrid between a pension and a defined contribution plan.
- Allows high-earning business owners to contribute significantly more than traditional retirement plans while capturing large tax deductions.
- The employer bears investment risks and the plan operates similarly to a pension, but account beneficiaries can take a lump-sum distribution.
These tax/retirement vehicles have advantages and disadvantages depending on your age, business structure, financial situation, and future retirement plans. You should discuss the options with your tax and investment advisors to determine which is most beneficial. At Ensign Partners, we can help you evaluate which methods can provide optimal benefits for you, your business, and your employees.
Timing Matters
Most retirement contributions must be made by December 31 to count for the 2025 tax year. IRAs and SEP IRAs can be funded up to the tax-filing deadline the following year; however, you must set them up in advance. If you wait until tax season to consider retirement contributions, you may lose valuable opportunities to reduce this year’s tax bill.
Strategic Considerations
Before moving ahead with any plan that involves making contributions to a retirement plan, you need to consider:
- Cash flow: Can your business or household comfortably support the contribution without straining liquidity?
- Entity type: Your business structure (LLC, S-Corp, etc.) influences contribution limits and deductibility.
- Future exit planning: Retirement accounts can play a role in long-term succession and wealth transfer strategies.
- Integration with taxes: Contributions should be coordinated with year-end tax planning, not handled separately.
Ensign Partners can align your company’s retirement strategies with your legal, tax, and financial goals, ensuring they serve the bigger picture, not just the current tax year.
Strategic Tax and Retirement Planning
Maximizing retirement contributions before December 31 is one of the simplest and most effective ways to reduce your tax bill and strengthen your future financial security. But the best plan isn’t just about hitting the maximum contribution limits; it’s about integrating retirement savings with your overall business and wealth strategy to benefit yourself and your employees.
Tax planning is not “one-and-done,” so don’t wait until April. By acting now, you’ll capture tax savings, boost retirement security, and enter the new year with greater financial confidence. Ensign Partners can help you align retirement contributions with your broader financial, legal, and tax strategy before the deadline has come and gone. To learn more or schedule a discovery meeting, contact Ensign Partners today.