Money Matters – Small Business Week: Retirement Plans
BOSTON (CBS) – Let’s start with the simplest plan first.
IRAs. You can contribute up to $5,000 this year and if you are over 50 you can use the catch up provision and put away an additional $1000.
But you must have earned income to contribute to an IRA. Let’s say your net income for this year is $30,000. You can shelter up to $5,000 of it by contributing to an IRA. If your net income is only $3,000 then you are limited to a $3,000 contribution for the year. Easy to set up just about anywhere. Contributions can be made with your tax return next year.
SEP-IRAs: Simplified Employee Pension Plan uses an IRA format. You can contribute up to 25% of compensation up to $49,000 for this year. Now if you choose a SEP-IRA and have employees you will need to contribute to their SEP-IRAs also and you must contribute the same percentage as you do for yourself.
So if you contribute 25% for yourself, then its 25% for your employees. If your net income is $30,000 and you use a SEP-IRA you would be able to contribute $7,500. Easy to set up with a mutual fund company or a brokerage company. Contributions can be made with your tax return next year.
SIMPLE-IRAs: Savings Incentive Match Plan for Employees was designed for small businesses with under 100 employees. But it is useful for the self-employed as well. Here you are both the employee and the employer. You can contribute up to 100% of compensation up to $11,500 for this year and if you are over the magic age of 50 an extra $2,500.
If you have employees they also can contribute to the plan and their limit is also $11,500. As the employer you will have to match the employee’s contributions usually up to 3%. So if you are self-employed and have a net income of $30,000 this year you could possibly put away as much $11,845.
SIMPLEs must be set up by October 1st if you want to use the plan this year. Easy to set up with a mutual fund company. Contributions can be made with your tax return next year..
401(k)s for the Self-employed: You can contribute up to $16,500. And if you are over the magic age of 50 you can contribute another $5,500. So with that same $30,000 income and using a 401(k) format you could contribute up to $16,500 this year. $22,000 if you are over 50.
One more thing: Plan on doing something. You can always do something different next year. But do put some money away for retirement.
Using $30,000 of net income as our basis depending on which you plan you set up you could legally shelter over half of your income ($16,500) for the year.