2025 Last-Minute Retirement Tax Moves for Business Owners

The clock continues to tick. Your retirement is now one year closer.

You still have time before December 31 to take smart, strategic steps that help you build the retirement you want.

By using the strategies in this article, you could uncover several thousand dollars (and potentially far more) that stay in your pocket. But you must act before year-end to secure the tax savings.

Big Picture

First, a note: all limits and thresholds in this article reflect the IRS 2025 inflation updates.

Here are the five opportunities explored in this article:

1. Establish your 2025 retirement plan before December 31 so you can make both employee and employer tax-deductible contributions. You can do this even if you are the sole owner and sole employee of a corporation or proprietorship.
2. Claim up to $15,000 in tax credits when your business creates a qualifying retirement plan for you and your employees.
3. Claim the small employer pension contribution tax credit, worth up to $3,500 per employee.
4. Claim up to $1,500 in credits by adding automatic contribution features.
5. Convert your existing retirement plan to a Roth IRA.

1. Establish Your 2025 Retirement Plan

First, a question: as you read this, do you have your retirement plan (or your corporation’s plan) set up?

If not, and if you have cash available to contribute, create your retirement plan now so you can secure a 2025 tax deduction.

For most defined contribution plans like 401(k)s, you operate as both employer and employee, whether structured as a corporation or sole proprietorship. This allows you to make both types of contributions, which can significantly boost your retirement savings.

Your plan document determines the deadlines for employee and employer contributions that qualify for 2025 deductions. Make sure you know those deadlines clearly.

Example

You are the only employee in your one-owner S corporation and want an individual 401(k) deduction for 2025. To maximize your 401(k) deduction, your corporate plan must be adopted on or before December 31.

If your S corporation 401(k) is established by December 31, you can make your employee contribution by December 31, 2025, of up to:

• $23,500 if you’re under age 50
• $31,000 if you are ages 50 through 59 or 64 or older
• $34,750 if you are ages 60 through 63

You can also make the employer contribution of up to 25 percent of compensation on or before December 31 or anytime before the 2025 corporate tax return is due, such as March 15, 2026 (or with extensions, September 15, 2026).

The combined employee and employer contribution limits are:

• $70,000 if you are under age 50
• $77,500 if you are ages 50 through 59 or 64 or older
• $81,250 if you are ages 60 through 63

For more on why the 401(k) is ideal for solo business owners, see Solo 401(k) Could Be Your Best Retirement Plan Option.

2. Claim the Improved Retirement Plan Start-up Tax Credit of up to $15,000

Two questions:

1. Are you the only employee in your business?
2. Is your retirement plan already in place?

If your answer is no to both, consider this: establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k), defined benefit plan, SEP, or SIMPLE IRA) can qualify your business for a non-refundable tax credit equal to the greater of $500, or the lesser of

(a) $250 multiplied by the number of eligible non-highly compensated employees

(b) $5,000.

If you have 50 or fewer employees, the credit is based on 100 percent of “qualified start-up costs.” With 51 to 100 employees, the credit equals 50 percent of those costs.

“Qualified start-up costs” include ordinary and necessary expenses for:

• establishing or administering the plan, and
• providing retirement-related education to employees.

The credit applies for the first year and the following two years, up to $5,000 per year ($15,000 maximum). Any excess costs can be deducted as ordinary business expenses.

Eligibility

You qualify if, in the prior year:

• You had no more than 100 employees earning $5,000 or more, and
• Your plan covered at least one non-highly compensated employee.

Solo business owners do not count as eligible employees since they are treated as highly compensated under the tax code.

Correction for multi-employer plans

SECURE 2.0 fixed the earlier rule that blocked this credit for employers joining multi-employer plans more than three years old. If you joined a plan after 2019 and missed the credit, file amended returns for eligible years.

3. Claim the New 2025 Small Employer Pension Contribution Credit (up to $3,500 per Employee)

SECURE 2.0 added a new credit for employer retirement plan contributions beginning with the plan start date. This credit applies to 2023 and later.

Not available for:

• defined benefit plan contributions
• elective deferrals under Section 402(g)(3)

In the first year, you may claim a credit up to 100 percent of employer contributions, capped at $1,000 per employee. In following years, the $1,000 cap stays the same, but the allowable percentage phases down:

• 100 percent in year 2
• 75 percent in year 3
• 50 percent in year 4
• 25 percent in year 5
• 0 percent in year 6 and beyond

Example

If you establish a plan this year and contribute $1,000 for each of your 30 employees, you receive a $30,000 tax credit.

If you have between 51 and 100 employees, reduce your credit by 2 percent for each employee above 50. If you have more than 100 employees, the credit is zero.

You also do not receive a credit for employees earning more than $105,000 in 2025.

4. Claim the Automatic Enrollment $500 Tax Credit for Three Years ($1,500 Total)

SECURE 2.0 created a non-refundable credit of $500 per year for up to three years when an eligible small employer adds automatic enrollment to a qualified plan like a 401(k) or SIMPLE IRA.

Most new 401(k) and 403(b) plans established in 2025 or after must include an automatic enrollment feature. The requirement does not apply to:

• SIMPLE 401(k) plans
• Government plans
• Church plans
• Businesses less than three years old
• Employers with 10 or fewer employees

The $500 credit is separate from the start-up credit and may apply to both new and existing plans. There is no additional cost required—you simply need to implement auto-enrollment.

Research cited by the House Committee on Ways and Means notes that automatic enrollment increases employee participation and long-term retirement savings.

Eligibility mirrors the start-up credit rules:

• no more than 100 employees earning $5,000 or more
• at least one non-highly compensated employee participating

Solo business owners are not eligible, as they are always classified as highly compensated and have no other employees.

5. Convert to a Roth IRA

Consider converting your existing 401(k) or traditional IRA to a Roth IRA.

If your investments grow significantly over time and you will not need the funds within the next five years, a Roth IRA can produce far better long-term financial outcomes than traditional accounts.

First, determine how much tax you will owe on the conversion so you know how much cash is required.

Five reasons to consider converting:

1. If your traditional IRA decreased in value, conversion taxes may be lower.
2. You can withdraw your Roth contributions tax-free and penalty-free at any time.
3. You can withdraw converted amounts tax-free, though doing so within five years triggers a 10 percent penalty.
4. Qualified Roth withdrawals (after age 59½ and five years) are completely tax-free.
5. Roth IRAs do not require RMDs at age 73, allowing uninterrupted tax-free growth.

Four reasons a traditional plan may cost you more:

1. Withdrawals before age 59½ often trigger tax and a 10 percent penalty.
2. You may owe significant taxes on future withdrawals.
3. Required minimum distributions begin at age 73 even if you don’t need the money.
4. Heirs of traditional IRAs may face large tax liabilities when withdrawing inherited funds.

Be sure you have outside cash to pay the conversion tax. Using IRA or 401(k) funds to pay the taxes often creates both income tax and a 10 percent penalty.

Planning note 1: If you expect a business loss this year, consider a Roth conversion, as explained in Five Strategies for Your Business Loss after Tax Reform.

Planning note 2: See Roth IRA versus Traditional IRA for more details on both options.

Takeaways

A retirement plan is one of the most effective wealth-building tools for business owners because it helps you save consistently while allowing your investments to compound either tax-deferred (traditional) or tax-free (Roth).

Step one is to establish your plan before December 31 so you can make both employee and employer contributions, even when operating as a one-person business.

If you have employees, take advantage of the available credits for plan start-up, employer contributions, and automatic enrollment.

And consider converting existing balances to a Roth IRA—doing so can offer major long-term benefits, especially when funds remain untouched for at least five years.

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