Year-End Tax Planning: Funding Your Retirement

The year will soon end and if you have not yet done so, consider putting together a tax planning strategy that includes saving for retirement. Entrepreneurs, Solopreneurs and all business owners are our own employers and we must secure our financial futures, whether we’ll squeeze a few thousand dollars from modest billable hours or roll in the overflow from a lucrative year.

Under no circumstances do we want to be old and broke in America and if one is single and female, that is a real possibility. Fortunately, there are good retirement plan options available to those with a few thousand dollars to spare and the discipline to save. Your contributions to most retirement funds are tax-deductible and taxes are not due until it’s time to draw down on the account (usually, age 59 1/2 the youngest and age 70 1/2, the oldest).

Contributions to self or employer-funded retirement accounts are guided by your net earnings. If you net $80,000 this year, then you may contribute 25% of that amount, or $20,000, to your retirement account. If you are age 50 years or older, most plans allow you to make a “catch-up” contribution of maximum $6500 (in 2016) that can raise your total allowed retirement fund contribution (and tax deduction). The maximum amount that one can contribute in 2016 is $53,000 and $59,500 for those age 50 years or older.

The Simplified Employee Pension Individual Retirement Account SEP IRA allows contributions of up to 25% of net earnings, for a maximum annual contribution of $53,000. Only business owners and the self-employed may participate. Employers contribute on behalf of employees (and that includes themselves, because business owners and the self-employed are both employer and employee). The percentage of employee earnings that the employer contributes must be equal for all participants in any given year and those contributions are tax-deductible. Salary deferrals and “catch up” contributions are not permitted, nor can a participant borrow from the fund.

The Savings Incentive Match Plan for Employees Individual Retirement Account SIMPLE IRA is tailored for Entrepreneurs and all employers with fewer than 100 employees. Contributions, which are technically salary deferrals, are tax-deductible and are made by employees. Employers are required to make annual matching contributions to their employees’ SIMPLE IRA accounts, whether or not the employee chooses to defer salary and contribute every year. Employers can match a maximum 3 % of the employee’s salary and in certain circumstances, can limit the employer contribution to 2%.

If you anticipate growth in your business that will likely cause you to hire even one full-time employee, then consider a SIMPLE IRA, because adding employees to the plan is relatively easy. Employee contributions are limited to $12,500 annually and the “catch-up” contribution for Entrepreneurs and other business owners who are age 50 and older is $3000.

However, as an Entrepreneur and business owner, you may contribute to your SIMPLE IRA as both employer and employee. You may contribute a maximum 3% of your net earnings, maximum $12,500 this year, and add $3000 more if you are age 50 or older.

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