Retirement Plan Basics
Why Have a Retirement Plan?
As a self-employed, small business owner, there are three good reasons for setting up your own retirement:
- Building Wealth
- Slashing Taxes
- Government Incentives
Larger Contribution Limits for Business Owners:
If you're a self-employed small business owner, you can stash much larger amounts of money into a tax-favored retirement plan than you could in a nonbusiness type savings account, like a traditional or Roth IRA.
For example, for tax year 2011, if you set up your own personal, non-business, traditional IRA, the most you can contribute is $5,000 ($6,000 if you're 50 years of age or over).
However, with a SEP-IRA (Simplified Employee Pension), you could contribute up to $49,000 (for 2010 and 2011).
Here are some of the tax breaks you get by having a business retirement plan:
- If your self-employed, contributions for yourself are deductible (on Form 1040, line 28 for tax year 2011).
- If you have employees, contributions you make for them are deducted directly from the income of the business that provides the retirement plan.
- For example, Schedule C filers deduct contributions made on behalf of employees on line 19.
- Plan assets grow tax free.
- Plan assets are not taxed until distributed.
The government provides significant incentives for small business owners and self-employed individuals to establish a retirement plan.
- Higher contribution limits for businesses:
- You and your employees can stash away larger amounts for retirement than could be put into a nonbusiness IRA.
- "Catch-up" rules:
- Depending on the type of plan, if you or an employee is aged 50 or over an additional
amount may be contributed over an above the regular contribution
- Tax credit for small employers (100 or fewer employees):
- You can claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or certain other types of plans.
- The credit equals 5 percent of the cost to set up and administer the pan and educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan.
- Saver's Credit:
- Certain low and moderate income individuals (including self-employed) who make contributions to their plan,
including a traditional IRA and Roth IRA, may be eligible claim a tax credit
for 2011 contributions made by April 17, 2012.
- Eligibility for the credit is based on your Adjusted Gross
- Depending on your AGI, you may be eligible for a credit
percentage of 50%, 20%, or 10%.
- The applicable percentage applies to the first $2,000 of
your contributions. However, regardless of your income, you
cannot claim the credit if any of the following apply:
- Your were born after January 1, 1994, or
- Are claimed as a dependent on another taxpayer's 2011
- You were a full-time student during five or more months
- Other limitations apply. Use
Form 8880 to
compute the credit.
Retirement Plan Basics: How Sole Proprietors and Partners are Classified for Retirement Plan Purposes