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.

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Does Obama’s Proposed 2015 Budget Affect Your Retirement Planning? It Does. Here’s How.

President Obama’s proposed 2015 budget would limit tax deductible contributions to 401(k)s and IRAs to 28% of income and cap retirement savers’ tax-deferred accounts to an amount needed to produce a joint and 100% survivor annuity of $210,000 beginning at age 62 (presently $3.2 million). The budget would also eliminate the carried interest provision that allows income from managed retirement investments to be taxed at the capital gains rate, while dropping the “chained” consumer price index proposal reducing Social Security cost-of-living adjustments.

Budget 2015
Additionally, it would require that Roth IRAs follow the same required minimum distribution rules as other retirement accounts (RMDs at 70 ½ similar to traditional IRAs). It also establishes a 5-year rule for IRAs inherited by (most) non-spouse beneficiaries (requiring that distributions be taken out over a five-year period of time) and establishes 60-day rollover rule for IRAs inherited by non-spouse beneficiaries. Finally, the budget includes mandatory automatic IRA enrollment for small businesses and RMD elimination for small retirement accounts of $100,000 (cumulative across all retirement plans).

Even though these provisions may not be enacted, it’s helpful to know what the President’s legislative agenda for this year is. We will monitor and keep you apprised of any developments.