Contributing to a retirement plan is one of the most effective tax reduction strategies available to NJ small business owners because it reduces both federal and NJ taxable income simultaneously. A SEP-IRA allows contributions up to 25% of net self-employment income (max $69,000 for 2024, $70,000 for 2025). A Solo 401(k) offers even higher limits through combined employee deferrals and employer contributions. Greg Monaco, CPA helps clients choose the right plan structure and maximize contributions each year.

Contributing to a retirement plan is one of the most effective tax reduction strategies available to NJ small business owners.

How Does a SEP-IRA Work for NJ Small Business Owners?

Contributions up to 25% of net self-employment income, max $69,000 for 2024. Easy to set up, no annual filing. Deadline extends to tax return due date. Main drawback: must contribute same percentage for employees.

How Does a Solo 401(k) Work and When Is It Better Than a SEP-IRA?

Both employee deferrals ($23,500 for 2025) and employer contributions (up to 25%). Combined max $69,000 plus $7,500 catch-up if 50+. Employee deferral deadline is December 31.

How Does a SIMPLE IRA Work for Businesses With Employees?

For businesses with up to 100 employees. Employee contributions up to $16,500 for 2025. Employer match up to 3% or 2% non-elective. Setup deadline is October 1.

What Are the NJ State Tax Benefits of Retirement Plan Contributions?

Contributions reduce both federal and NJ taxable income. At NJ’s top rate of 10.75%, state savings alone can be significant.

Key Takeaway

Retirement plan contributions produce a dollar-for-dollar reduction in taxable income at both the federal and NJ level. At NJ's top rate of 10.75% combined with a 35% federal rate, every $10,000 contributed saves roughly $4,575 in taxes. The key is choosing the right plan for your business structure, employee situation, and contribution goals.

Related reading: Year-End Tax Moves for NJ Business Owners | S-Corp Salary vs. Distributions | Top 5 Overlooked Deductions | Tax planning services

## Frequently Asked Questions

What is the maximum SEP-IRA contribution for self-employed?

Self-employed individuals can contribute up to 25% of net self-employment income to a SEP-IRA, with a maximum of $70,000 for 2025. The actual calculation uses adjusted net self-employment income (after the self-employment tax deduction), so the effective rate is approximately 20% of net Schedule C income. Contributions are due by the tax return filing deadline, including extensions.

What is the advantage of a Solo 401(k) over a SEP-IRA?

A Solo 401(k) allows both employee deferrals ($23,500 for 2025) and employer contributions (up to 25% of compensation), potentially enabling higher total contributions. It also permits catch-up contributions of $7,500 for those age 50 and older. Unlike a SEP-IRA, the employee deferral portion must be elected by December 31 of the tax year.

Do retirement plan contributions reduce NJ state taxes?

Yes. Contributions to qualified employer-sponsored retirement plans like SEP-IRAs, Solo 401(k)s, and SIMPLE IRAs reduce both federal and NJ taxable income. At NJ's top rate of 10.75%, a $50,000 contribution could save up to $5,375 in NJ taxes alone, on top of federal savings.

Can I set up a retirement plan after year-end?

It depends on the plan type. A SEP-IRA can be established and funded up to the tax return due date, including extensions. A Solo 401(k) must be established by December 31 of the tax year, though employer contributions can be made until the filing deadline. A SIMPLE IRA must be established by October 1 of the year for which contributions are being made.