Retirement plans continue to be one of the best income tax deferral techniques available, providing the joint benefits of a current tax deduction and deferred tax on investment income in the plan.
Plan options vary, depending on whether you are self-employed, own a business, or are an employee. Some plans have to be set up and funded prior to year-end, but others can be established and funded up until the due date of the return, including extensions.
In addition to saving for your own retirement, you can help your employees and reduce your tax liability by sponsoring a qualified deferred compensation plan such as a pension, profit-sharing, 401(k), or simplified employee pension plan (SEP). You receive a tax deduction for your contributions to employees’ accounts, and your employees get the benefits of tax-deferred savings.
If you’re self-employed, you may contribute to a SEP or profit-sharing plan until the due date of your return, including extensions. For 2017, the maximum amount you may contribute to a Keogh plan is $54,000.
A SEP is also a flexible tax-planning tool. A SEP sponsor must be a business or a self-employed individual, and only the company or the owner may make contributions to the plan.
A SEP can be set up and funded until the due date of the business’s tax return (or until the extended due date) and still reduce your 2017 tax liability.
Employers and self-employed individuals may take deductions up to 25 percent of total eligible compensation, after deductions for SEP contributions and self-employment taxes. The SEP limit for 2017 is also $54,000.
Roth IRAs are similar to traditional IRAs in that you can contribute up to $5,500 if single, or $11,000 if married, until the due date of the return. Contributions to a Roth IRA are not deductible; but upon distribution, proceeds are tax-free. Contributions may be phased out at certain adjusted gross income amounts.
If you’re interested in establishing a retirement plan, contact a member of the KraftCPAs employee benefits team. Our firm has experience in designing and administering benefit plans. We can help you understand the advantages and disadvantages of various plan options so you can decide the type of plan that will meet your specific needs.