Retirement Plan Basics

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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

Build Wealth

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).

Slash Taxes

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.

Government Incentives

The government provides significant incentives for small business owners and self-employed individuals to establish a retirement plan.

Incentives include:

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 amount..
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 Income (AGI).
- 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 return, or
  - You were a full-time student during five or more months in 2011
- Other limitations apply. Use Form 8880 to compute the credit.

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