Have you procrastinated in setting up a tax-advantaged retirement plan for your Maine-based small business? If so, you are paying income taxes that could easily be avoided and putting your retirement financial situation at risk. You can set things right by taking action and positioning yourself for tax savings in the future.
This article explains the SIMPLE-IRA, which is a tax-advantaged retirement arrangement well suited to the one-person business that generates modest income. Of course, your account balance at retirement age will depend on factors such as how soon contributions start, how much you contribute annually, and the rate of return earned on investments held in your account. Talk with Filler & Associates about the best way to grow your retirement funds.
Earnings on your SIMPLE-IRA balance are allowed to accumulate tax-free until withdrawals commence. There’s no limit on how much can be accumulated in your account. Therefore, the sooner contributions start, the sooner you can start collecting annual tax savings.
Self-employed individuals can set up SIMPLE-IRAs. So can one-employee corporations and other employers with up to 100 workers.
For 2014, the maximum contribution to your account is the lesser of:
- 100 percent of your self-employment income or 100 percent of the salary from your corporation.
- $12,000 (unchanged from 2013).
This is considered an elective deferral contribution made by the self-employed individual or employee to his or her SIMPLE-IRA.
In addition, the employer generally must make a matching contribution equal to the lesser of:
- Three percent of your self-employment income or three percent of the salary from your corporation.
- 100 percent of your elective deferral contribution.
When your business is run as a sole proprietorship (or as a single-member LLC that is treated as a proprietorship for federal tax purposes), you’re considered self-employed. Therefore, you make the employer matching contribution, as well as the elective deferral contribution, on your behalf. You then claim deductions for both contributions on your Form 1040.
What if you are employed by your own S or C corporation? In that case, the company makes the employer matching contribution to your account. The elective deferral contribution is withheld from your salary. Your corporation claims a deduction on its tax return for the employer matching contribution. The taxable salary shown on your W-2 from the corporation is reduced by your elective deferral contribution, which amounts to a personal deduction for you.
To help decide if a SIMPLE-IRA is right for you, Filler & Associates has come up with a list of pros and cons:
- If your small business produces a modest amount of income, a SIMPLE-IRA can permit much larger annual deductible contributions to your account.
- SIMPLE-IRA elective deferral contributions are completely discretionary. If you don’t make an elective deferral contribution for a particular year, there is no required employer matching contribution. Therefore, you can limit contributions to very minimal amounts, or nothing at all, in years when cash is tight.
- You can set up a SIMPLE-IRA by filling out a fairly simple document available at most brokerages and financial institutions. You don’t need to file an annual report with the federal government.
- If your business produces more than a modest amount of self-employment income or corporate salary for you, the SIMPLE-IRA is probably not the best choice. Other plans, such as SEPs, defined contribution plans, and 401(k)s, may permit much larger annual deductible contributions.
- If your business has other employees, you may have to make SIMPLE-IRA employer matching contributions for them. Matching contributions are 100 percent vested immediately. You must allow all employees to participate in a SIMPLE-IRA plan if they earned $5,000 or more during any two previous years, consecutive or not, and are reasonably expected to earn at least $5,000 in the current year.
- Borrowing from a SIMPLE-IRA is prohibited. In contrast, most other plans allow borrowing, assuming the plan document permits it.
Establishing a SIMPLE-IRA could result in significant tax savings. Filler & Associates can help you determine if it’s the best choice of retirement plan for your small business.