Last Minute Small Business IRA Contributions: SEP & SIMPLE IRAs
Although tax season may not be a crowd favorite, there are instances where individuals and employers can benefit. Taking preemptive measures and planning year-round in anticipation of everyone’s favorite day, Tax Day, there are situations that allow for lowering taxable income. In our previous edition, we discussed strategies for individuals and in this edition, we are going to delve into the strategies geared towards small business owners. Business owners have the opportunity to lower their taxable income and to motivate and entice their already hardworking employees.
Just as there are retirement accounts for individuals, there are retirement accounts designed for small business owners and their employees. While SEP and SIMPLE IRAs are both beneficial in their own right, it is important to gain a strong understanding of how they work so that you, as the business owner, can determine which strategy best fits you, your business and your unique facts and circumstances.
A SEP IRA, which stands for Simplified Employee Pension will provide employers a simplistic method to contribute simultaneously towards their retirement as well as the retirement of their employees. Like a regular IRA, contributions, also known as deferrals, are made directly to an account which gets established for each employee. A SEP IRA is completely employer funded.
One of the most notable benefits of the SEP IRA is the elevated contribution limit compared to that of a Traditional IRA or Roth IRA. For the 2016 tax year, business owners were able to contribute up to 25% of their income or $53,000, whichever amount was less. This is significantly more than the $5,500.00 (or $6,500 for those over age 50) that an individual could contribute to their Individual Retirement Account (IRA). Take note that the SEP IRA contribution limit for 2017 will be increased to $54,000.00 and it is very important to know the difference because contributing too much to any type of IRA can result in excess contribution penalties.
While a SEP IRA does not allow for the business owner’s employees to contribute to their own account, there is an alternative strategy that allows for both the employer and employees to contribute. This is the Savings Incentive Match Plan for Employees IRA, most commonly known as the SIMPLE IRA. As contributions made to a SIMPLE IRA are also tax deductible, such contributions, by the employee, are called elective-deferrals or salary-reduction contributions because the money is put into the account on a pretax basis.
Employers are required to make matching contributions to their employees’ SIMPLE IRA accounts. How much is an employer required to match? Even though this matching contribution may be a direct dollar for dollar match, there is a maximum of 3% of the employee’s compensation. A main benefit of the SIMPLE IRA is that employers receive a tax deduction for their contributions too. Other advantages to this this type of retirement plan account includes low start-up and maintenance costs as well as the fact that they are very easy plans to administer. For the 2016 tax year, the contribution limits for a SIMPLE IRA is $12,500.00 plus an additional $3,000.00 as catch-up contributions for those over the age of 50. These limits will remain the same for 2017.
For the small business owner looking to lower their taxable income while deferring more than $5,500.00 for the year, a SEP IRA or a SIMPLE IRA may very well be a beneficial strategy. Before making any financial decisions, it is vital that you converse with your Tax Advisor in addition to a seasoned Financial Professional given that everyone’s financial facts and circumstances may vary and what may be right for one could be a detriment to someone else. Be sure to check the latest Mitlin Minute to learn more about these types of retirement plan accounts and if this is an area you’d like to discuss with regards to your own business, feel free to give us a call at (631) 952-4466 x13 and allow Mitlin Financial, Inc. to facilitate your financial future!
Tags: Financial Advisor, Taxes, Tax Planning, Traditional IRA, Contributions, Tax Deferred, Tax Deductible, Contribution Limit, Catch-up Contribution, SEP IRA, Simple IRA, Small Business, Employer, Employee, Salary-Reduction Contributions, Elective-Deferrals, Business Owner