BGBC Partners, LLP Tax Update: Retirement Planning Options
Although we’re still in the summer season, it’s never too early to think about good year-end tax planning ideas! There are many strategies available when planning for tax savings, and retirement plans should be one of those. Below we will highlight some of the aspects of the more common retirement plans available and their contribution limits for 2016.
Individual Retirement Account (IRA) – An individual may make deductible contributions (subject to income limitations) by taking a deduction reducing adjusted gross income (AGI) on his or her individual income tax return. Nondeductible (or after-tax) contributions may also be made and are not subject to any income limitations. Individuals may make contributions of up to $5,500 of earned income, plus an additional $1,000 “catch-up” contribution for individuals age 50 and over. You may contribute to the IRA any time during the year and up to the due date (April 15) of your return for the designated tax year. Generally, distributions taken after age 59 ½ are taxed as ordinary income, except for the nondeductible portion that is withdrawn.
Roth IRA – All contributions are nondeductible (after-tax) and may be limited based on your AGI. Individuals may not contribute directly to a Roth IRA if your AGI is greater than $132,000 for “single” filers and $194,000 for “married filing joint” filers. Contributions are based on an individual’s earned income and are limited to $5,500, plus the $1,000 “catch-up” amount for individuals age 50 and over. Contributions may be made any time during the year and up to the due date (April 15) of your return for the designated tax year. Qualifying distributions are generally tax-free to the taxpayer.
Simplified Employee Pension (SEP) – A SEP is a variation of an IRA. Contributions may only be made to the individual’s account by the employer, at the employer’s discretion, and must be made according to a specific written formula to prevent discrimination. Employees must meet certain eligibility requirements in order to participate: must be at least 21, worked during the year in which contributions are made, worked at least three of the previous five years for the same employer, and earned at least $600 in compensation during the year for which the contribution is made. Contributions may be made up to 25% of the participant’s compensation or $53,000, whichever is less. Contributions made by the employer are deductible business expenses, but are not included in an employee’s gross income. A SEP can be established, and contributions must be made, for a year as late as the due date (including extensions) of the business’s return. Qualifying distributions are taxed as ordinary income to the employee when withdrawn.
Savings Incentive Match Plan for Employees (SIMPLE) – A SIMPLE is also a variation of an IRA. Businesses eligible to have a SIMPLE are ones with 100 or fewer employees who earned at least $5,000 in compensation in the preceding year. Eligible employees are allowed to make pre-tax elective contributions based on a percentage of their compensation to an IRA. The maximum elective contributions an employee may make is $12,500, plus an additional $3,000 for individuals age 50 and over. Employers are required to make contributions to employee’s accounts, which are generally deductible as business expenses. Typically, a business will match employee contributions dollar-for-dollar up to 3% of each participating employee’s compensation. A SIMPLE must be established no later than October 1 of the year it is to be effective. Qualifying distributions are taxed as ordinary income.
401(k) Plans – A 401(k) plan is a cash or deferred arrangement (CODA) that is part of a profit-sharing plan. Eligible employees may elect to defer a portion of his or her compensation up to a maximum of $18,000, plus $6,000 for individuals age 50 and over. Employers may make deductible matching contributions of up to 25% of the employee’s compensation each year at their discretion. However, total annual contributions by both the employer and employee cannot exceed $53,000 ($59,000 for those 50 and older). A 401(k) plan is more complex than the other plans above and is subject to annual testing and additional reporting requirements. A 401(k) plan must be established by the end of the year for which it is to be effective. Qualifying distributions are taxed as ordinary income.
There are many retirement plan options available to businesses and individuals. Each plan has its own qualifications and advantages/disadvantages compared to the other plans. As the information above only highlights some of the aspects from each type of retirement plan, be sure to consult your tax advisor to determine which plan would best fit into the tax plan for you and/or your business. You spend a lot of time looking after your customers; be sure to also spend time looking after your retirement needs!
BGBC Partners, LLP is a full service certified public accounting and business consulting practice.
For more information, contact Brad Bell, CPA or Steve Reed, CPA/ABV/CFF at BGBC Partners, LLP (317-633-4700).
