Wednesday, December 22, 2010

Smart year end tax moves part 1

One of the fastest ways to lower your tax bill and potentially pay yourself is through contributions to a retirement plan.

The reason I bring this up now is that most employer sponsored plans must be in place before December 31, of the year qualifying retirement plan contributions are to start, even if funding is allowed after the end of the year.

Every year I receive at least three phone calls in the last weeks of the year wanting to know more about retirement planning.

My best piece of advice for clients is to do your homework. As a business owner there may be multiple types of retirement plans available to you. If you are a small business, and want to keep costs low, options include traditional IRA accounts for employees, SIMPLE-IRA plans and SEP-IRA plans. I will cover these three types in this posting and focus on the other more costly, but maybe more flexible plan types in a subsequent post.

First I will cover traditional IRAs. This is one of the simplest types of employee benefits you can offer. If you decide to offer this plan, you offer it as an additional salary reduction item, so as you withhold amounts from the individual's paycheck you are required to remit that amount to their IRA account directly. Any size business can participate in this type of plan. This option is nice, because it is treated similar to other payroll deductions; limited record retention is required and employees can change their withholding amount at any time. The maximum contribution for 2010 is $5,000 with additional $1,000 available for persons over 50 years of age.

Next are SIMPLE IRA Plans. This plan requires minimal initial paperwork (see my previous post SIMPLE IRA Plans, mind the details and everything will be OK). This is also a salary reduction type of plan, however only businesses that have fewer than 100 employees can participate. There is also a limited amount of required matching by the employer, but the employer only is required to match a low percentage of contributions for participating employees. Employee deferals are limited to $11,500 per employee with an additional $2,500 available for employees over 50 years of age. Certain time of service and earnings restrictions may apply to employees pursuant to limitations detailed in the plan document.

Finally, a SEP IRA Plan is a third option. This plan type is different than SIMPLE IRA plans and traditional IRA plans. This plan allows for employer contributions to employee accounts from the profits of the business. The plans are very easy to set up with a simple form available on the IRS website, and some additional record keeping required. Once the plan is set up the business owner may decide on a yearly basis whether to make a contribution to the plan or not (and the amount as long as the contribution is not discriminatory). Beyond that, the employer may exclude certain employees based upon age, years of service, and earnings. The allowable contribution to these plans is much larger. The maximum contribution to each individual is $49,000 limited to a maximum of 25% of payroll for the year.

I will cover more about year end planning with contributions, especially as it relates to S-Corporations in a subsequent post.

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