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Maximizing
Retirement Plan Contributions for Small Businesses
Along with making
money with their business, most small business owners also try to minimize
income taxes and grow their wealth. Qualified retirement plans present
an excellent opportunity to accomplish these last two objectives. While
the rules for retirement plans can be confusing and you may want to consult
qualified tax and investment advisors, here are some guidelines that can
prepare you for those conversations.
Single employee
businesses
This article focuses on the opportunities for sole proprietors and companies
that employ only the owner (and a spouse). Individuals such as real estate
brokers, consultants, outside board members, sole professional practitioners
and other self-employed individuals can have a great deal of flexibility
in choosing a plan that best fits their goals. Businesses that have other
employees must cover those employees in most cases and should seek guidance
for a more detailed explanation of the options.
SEP-IRA
The SEP-IRA is probably the easiest plan to have.
The plan can be established and funded any time up to the due date or
extended due date of your tax return.
The employer can contribute up to 25% of your W-2 or self-employment income
to a maximum of $51,000 (2013).
Contributions are deducted from the employer's current taxable income.
SIMPLE-IRA
These plans are relatively easy to have and are generally more attractive
than SEP-IRAs if your income is less than about $40,000.
Generally, the plan must be established by October to provide tax deductions
for the current year.
For 2013, employees can defer up to $12,000 of wages into the plan and
employers can match the employee contribution up to 3% of the employee's
wages. The 2001 Tax Act also provided for an additional employee $2500
"catch-up" contribution for 2012.
The employee's deferral reduces their taxable wages and the employer contributions
are deducted from their current taxable income.
The NEW One Person
401(k) Plan
Large companies have been using 401(k) plans for many years. Recent changes
have resulted in these attractive plans now being attractive to single
employee businesses. These plans are more complicated than SEP-IRAs and
SIMPLE-IRAs, but offer higher contribution limits and more flexibility.
- The plan must be
established before year-end and contributions must be made by the due
date or extended due date of your tax return.
- For 2013, employees
may defer up to $17,500 of their wages into the plan. In addition, the
employer can contribute up to 25% of the employee's income (maximum
income considered is $255,000 for 2013). There is also an overall limit
of $50,000 for employee and employer contributions. The 2001 Tax Act
also provides for an additional $5,500 "catch-up" contribution
for 2013.
- 401(k) plans also
enable employees to borrow from their plan subject to certain restrictions
and repayment schedules.
2013
Maximum Deductible Contributions for Incorporated Businesses
| Plan
type |
Calculation
method and source of funds |
W-2
Income
|
| $15,000 |
$50,000 |
$100,000 |
$150,000 |
| SEP-IRA |
25%
of income (employer) |
$3750 |
$12,500 |
$25,000 |
$37,500
|
| Simple
IRA - under age 50 |
$12,000
(employee) plus 3% of income (employer) |
$12,450 |
$13,500 |
$15,000 |
$16,500 |
| Simple
IRA - over age 50 |
$12,000
(employee) plus 3% of income (employer) plus $2500 catch up (employee)
|
$14,950 |
$16,000 |
$17,500 |
$19,000 |
| One
person 401k under age 50 |
$17,500
(employee) plus 25% of income (employer) |
$15,000
(limited to income) |
$30,000 |
$42,500 |
$51,000
(overall limit) |
| One
person 401k over age 50 |
$17,500
(employee) plus 25% of income (employer) plus $5500 catch up (employee) |
$15,000
(limited to income) |
$35,500 |
$48,000
|
$56,000
(overall limit) |
Summary
Very small business owners and sole proprietors have options and flexibility
to reduce taxes and accumulate wealth through the use of qualified retirement
plans. Be sure to get the qualified advice you need when making this important
decision.
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