Many types of retirement plans allow contributions to be made after year end. And last-minute retirement contributions can be a powerful strategy: You can lower your 2024 taxes while simultaneously growing your retirement savings. But what if you didn’t set up a retirement plan in 2024? Don’t worry; some plans allow contributions — and tax deductions — for the 2024 tax year, even if they’re set up in 2025!

IRA Contributions

Anyone with earned income in 2024 (or who has a spouse with sufficient earned income) can set up an IRA by April 15, 2025, and make a 2024 contribution by that deadline. Contributing to an IRA every year — making the maximum contribution if you can afford it — can provide valuable benefits. Depending on the type of IRA, contributing can reduce your taxes now or provide tax-free income during retirement. And an IRA’s tax-deferred (or tax-free) compounding on investment earnings can help you build a bigger retirement nest egg than you could in a taxable investment account.

For 2024, the contribution limit is $7,000, or $8,000 for those age 50 or older. This applies on a combined basis to all IRAs, including:

Traditional IRAs. Contributions to traditional IRAs can be deductible, but distributions generally will be taxed (at least at the federal level). Your deduction may be phased out based on your adjusted gross income (AGI) and whether you (or your spouse) participate in an employer-sponsored retirement plan. (See “2024 Adjusted Gross Income Phaseout Ranges for IRA Contributions” below.) If AGI falls within the applicable range, a partial deduction is available. If AGI exceeds the top of the range, no deduction can be claimed.

Roth IRAs. Contributions to Roth IRAs aren’t deductible, but qualified distributions will be tax-free. Eligibility to make Roth IRA contributions depends on AGI. (See “2024 Adjusted Gross Income Phaseout Ranges for IRA Contributions” below.) If AGI falls within the applicable range, a partial contribution can be made. If AGI exceeds the top of the range, no contribution can be made.

If your income is too high for deductible traditional IRA contributions or for Roth contributions, consider making a nondeductible traditional IRA contribution. While these contributions don’t provide an immediate tax deduction, they still offer the benefit of tax-deferred growth on investment earnings. And when you take distributions in retirement, only the portion attributable to earnings will be subject to tax.

Alternatively, non-deductible contributions can potentially be converted to a Roth IRA through a backdoor Roth strategy. This allows higher-income earners to take advantage of fully tax-free withdrawals in retirement. (However, be aware that you might owe some tax on the conversion.) This approach can be particularly beneficial for those looking to diversify their retirement savings across different types of tax treatment during retirement.

Additional Retirement Plan Options for Small Business Owners

If you’re a small-business owner or self-employed, you might be able to set up a retirement plan that allows you to make much larger contributions than you could make to an IRA. Three retirement plan options that allow contributions for the 2024 tax year even if the plan is established in 2025 are:

1. Simplified Employee Pension (SEP) IRAs,
2. Profit-sharing plans, and
3. Defined benefit plans.

To make deductible contributions for 2024, you must set up your plan and contribute by the applicable tax return filing deadline, including extensions. The tax filing deadlines for calendar-year businesses are as follows:

• March 17, 2025, for pass-through entities, including partnerships, limited liability companies treated as partnerships for tax purposes and S corporations (September 15, 2025, if an extension is filed), and
• April 15, 2025, for C corporations and self-employed individuals (October 15, 2025, if an extension is filed).

To choose the right retirement plan for you, consider such factors as contribution limits and flexibility, administrative requirements, and your short- and long-term financial goals. Keep in mind that if you have employees, they generally must be allowed to participate in the plan, provided they work enough hours and meet other qualification requirements.

1. SEP IRAs

A SEP IRA is a retirement plan for self-employed individuals and small business owners that’s easy to set up and maintain. It also allows high contribution limits. Another benefit, especially if you have employees, is that you’re not required to make contributions every year, and you can decide how much to contribute each year.

However, a SEP IRA doesn’t allow employee salary deferrals (including catch-up contributions). So if you’re age 50 or older, you won’t be able to reap the benefits of making catch-up contributions for yourself. If you have employees, employer contributions must be proportional for all employees, which will affect how much you can contribute for yourself.

The 2024 contribution limit is the lesser of:

• $69,000, or
• 25% of compensation.

However, if you’re self-employed, special rules apply to the calculation that may reduce your maximum contribution.

2. Profit-Sharing Plans

A profit-sharing plan is a retirement plan that allows employers to make discretionary contributions to employees’ retirement accounts based on company profits or a fixed formula. As a business owner or self-employed person, you essentially make contributions as the employer to an account for yourself as an employee. Like a SEP IRA, a profit-sharing plan has high contribution limits (also the lesser of 25% of compensation or $69,000 for 2024) and allows flexible employer contributions.

One advantage over a SEP IRA is that a profit-sharing plan can be combined with other retirement plans, such as a 401(k) — which allows employee salary deferrals, including catch-up contributions if the employee is eligible. If you’re age 50 or older, that means you can make catch-up contributions as an employee on top of the “employer” contributions you make to yourself. A profit-sharing plan also can include options — such as service requirements, vesting schedules and plan loans — that aren’t available under SEP IRAs.

However, a profit-sharing plan is more complicated to administer than a SEP IRA. It requires a formal plan document and compliance with nondiscrimination rules.

3. Defined Benefit Plans

A defined benefit plan is a retirement plan that pays a specific benefit at retirement. Payments are typically based on a formula that considers factors such as salary history and years of service. Then the contributions needed to attain that benefit are actuarially calculated. As a result, a defined benefit plan sometimes allows significantly higher contributions than other plans, especially if you’re older.

For 2024, the maximum compensation to be considered in determining the future benefit (and, thus, the 2024 contributions) is the lesser of:

• $275,000, or
• 100% of average earned income for the highest three consecutive years.

This type of plan can fit the needs of older high-income earners looking to make substantial contributions, especially if employees are much younger (because contributions on behalf of these employees will be relatively low). However, a defined benefit plan requires ongoing actuarial calculations, has higher setup and maintenance costs, and mandates annual contributions.

Set Up, Contribute, Save

Last-minute retirement plan contributions can help reduce your taxes. But time is running out for the 2024 tax year. Contact your tax and financial advisors to ensure you choose the plan and contribution level that suits your situation.

2024 Adjusted Gross Income Phaseout Ranges for IRA Contributions