It doesn't matter if you’re a small business owner or an employee working at a large company, it's important to have a retirement strategy in place to ensure you’ll be taken care of when your working days are behind you. There are several types of retirement plans to choose from, and knowing how to navigate the tax hurdles associated with each one is key.
One of the most popular retirement plans is an individual retirement arrangement (IRA), which relies on tax incentives to encourage people to save money. They can easily be set up through a bank, life insurance group or financial planner.
A closer look at IRAs
There are several types of IRAs to consider, so it’s important to work with your financial partner to determine the best fit for you. A few options include:
a Traditional IRA, which allows most individuals to make tax-deductible contributions., and the funds in this type of IRA are generally not taxed until withdrawn;
a Roth IRA, which is subject to the same general rules as a Traditional IRA with a few noteworthy exceptions. For instance, contributions aren’t tax-deductible, and, qualified distributions are tax-free. That means if you’re starting your retirement planning at a young age, you’ve got decades of tax-free contributions ahead of you and a retirement full of tax-free withdrawals; and
a SIMPLE IRA, which is a business retirement plan that allows employees and employers to contribute to traditional IRAs set up for employees. It’s a great option for small businesses looking to offer their first retirement savings plan for their employees.
Depending on your age and the type of IRA you have, there are limits to how much you can contribute to each. Additionally, there are penalties for withdrawing money before you reach a certain age, and distributions are generally required beginning in the year after you reach the age of 70-and-a-half years old.
Exploring other retirement options
Another popular retirement savings plans for businesses is a 401(k) plan, which allows employees to elect to have their employer set aside a portion of their wages in an individual account. These plans can incorporate profit-sharing and even stock bonus plans. The set-aside wages are usually not subject to federal income tax withholding at the time of contribution, nor are they reported as taxable income on the employee’s individual income tax return.
If you're a business owner, a simplified employee pension Simplified Employee Pension (SEP) might be a good fit. It enables employers to make contributions toward both the retirement of their employees as well as themselves. It’s easy to set up, lacks the start-up and operating costs of a conventional retirement plan, and is recognized as a viable option for businesses of varying sizes. While the employer makes the contributions to these accounts, the employee always has complete ownership of their SEP funds.
Are you interested in setting up a retirement plan, but not sure what’s the right plan for you from a tax perspective? Whether you’re a business owner or an employee, our talented team of CPAs, enrolled agents and tax professionals can offer some helpful guidance. Find an office near you and set up an appointment today!
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