Rethinking Retirement Age

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The age at which we retire has traditionally been linked to cultural norms and external factors such as the availability of a company pension, health care and Social Security retirement benefits. Pensions were designed to incentivize long-service with a single employer while also establishing formulas that would provide reliable incentives for employees to eventually retire. While there has been a dramatic shift from a manufacturing economy to one based on the delivery of goods and services, the decision to retire based on attaining a set age remains stubbornly persistent. As the self-funded and self-managed retirement replaces traditional lifetime pensions, fresh thinking has emerged on how to manage the risk of outliving one’s assets. Rethinking retirement as a ratio of working years to leisure years is beginning to gain acceptance as a more thoughtful way of addressing this and other retirement risks.

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Last Minute Tax Tip: How Entrepreneurs can get BIG Tax Breaks through Retirement Savings

With Tax Day in 2 weeks, you might be wondering whether there are any last minute things you can do to save on taxes from latax-dayst year’s income.  Good news: if you’re an entrepreneur, there is!

Did you know that if you’re self-employed or a small business owner there is a special type of pension plan available for you (and your employees)?  Available for businesses of any size, a simplified employee pension plan (SEP-IRA)is a written arrangement that allows a self-employed individual or a business owner to contribute to a pension plan with significantly higher limits than a traditional IRA.

A self-employed individual can contribute (pre-tax!) between 0-25% of their compensation (maximum contributions up to $51,000 for 2013, $52,000 for 2014); here’s the small catch: each eligible employee has to get the same percentage.

There are distinct advantages to setting up a plan like this:

  1.      You can contribute more (up to $51,000) to a plan like this than the traditional IRA maximum annual contribution of $5,500
  2.      The contribution is tax deductible
  3.      The account grows tax deferred until you withdraw the money
  4.      There are no annual reporting requirements for SEPs as long as each participant or individual who is in the plan receives a copy of the plan agreement and disclosure form (this is unlike a traditional 401K, defined contribution plan, or defined benefit plan, which have an annual 5500 form filing requirement)

In order to deduct the contribution, you must establish the plan by April 15th and contribute to the plan by April 15th (or the due date of your return including extensions – check with your accountant).

There are very few drawbacks to setting one of these plans up.

How to set up a SEP-IRA:

SEP-IRAss can be set up through a financial advisor, through a brokerage house, or through a bank.

Participants are eligible to sign up for a wide variety of investment opportunities including mutual funds, stocks, bonds, ETFs, and many more.

There should be no establishment fees to launch the plan and annual fees are minimal.

This great way anyone who is self-employed who has a profit to shelter some of that income from taxation.   We recommend using this worksheet to figure out your savings or, as always, contact us.

Secrets to Claiming a Home Office Tax Deduction

Over 25 Million Americans work from home, but only 3.4 Million claim the home office Home-Office-Workspace-Furniture-White-Simplededuction.  Whether you’re a homeowner or a home-renter, if you work at home or use your home for business at all, you may be eligible to claim a home-office deduction this tax season.

There are some new home-office deduction rules that apply. But before we dive into those, let’s go over the requirements for claiming the tax deduction.

If you use your home for business, in order to claim a home-office deduction, the home–office:

1. Has to be used regularly and exclusively for business

2. Has to be your principal place for business

What do these two requirements mean?

1. Has to be used regularly and exclusively for business. You must use the area on a regular basis as your place for doing business and the area must be used exclusively for that business.  It doesn’t need to be an entire room, but it does need to be an area that has clear boundaries (for example, the desk set-up in the corner of a room).  Merely working at your kitchen table filing paperwork because you couldn’t get all your work finished in the office does not qualify.

2. Has to be your principal place for business.  The rule of thumb here is that no substantial portion of your business is carried out in another fixed location (i.e. office).  If you’re having face-to-face meetings at home or use it for the administrative portion of your business, even if you carry out business elsewhere, you can still qualify for the deduction for that room that is regularly and exclusively for business (for example with a carpenter or an interior designer who spends most of their time in other people’s homes).

  • If you have a separate, freestanding building – a studio, barn, garage behind your house, that too, can qualify.
  • For Freelancers:  You may have a full-time job at an office, but freelance on the side (writer, blogger, entrepreneur).  Good news: you can still qualify for their business as long as it is regularly and exclusively for business and used as your principal place of that business.
  • If you are an employee and you use part of your home for business, you also may qualify for a deduction, but, in addition to the two tests above, you also have to prove that: 1) it is for the convenience of the employer (there are no hard and fast rules for that) and 2) you must not rent any part of your home to the employer and use the rented portion to perform services as an employee for that employer

There are 2 methods for calculating the home-office deduction.

1. Simplified method.  Effective, January 1, 2013, this is a new simplified option (outlined methodology in detail in IRS Revenue procedure 2013-13) which significantly reduces the record keeping burden by allowing you to multiply a proscribed rate by a percentage of square footage used by the home-office.  The proscribed rate is $5 per square foot for a maximum of 300 square feet or $1500 dollar of tax savings.

2. Regular method. This method has been around for many years, whereby you must determine the actual expenses for your home office.  The expenses that can be allocated towards home office use can include things such as insurance, light, heat, power, repairs, depreciation, real estate taxes, and mortgage interest.

We suggesting calculating both ways to see which method will result in a bigger deduction.

For more information, call us.