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Saving for
Retirement: So Many Choices
By: Renee
Daggett
Saving for retirement is very important, since
the average American spends 20 years in retirement. Everyone needs to
make saving for retirement a priority, especially since we are living
longer with healthier lifestyles and medical advances. And, we all
know that we cannot rely on Social Security. The sooner you start
saving, the more time your money has to multiply. But, retirement is
expensive. Experts estimate that you will need about 70 percent of
your pre-retirement income to maintain your standard of living when you
stop working, unless you want to live with one of your children. Not
only is building your retirement account a good thing, but there are also
many tax benefits that come along with putting money aside.
 FOR BUSINESSES:
Corporations, sole proprietors and partnerships can set up and offer
retirement accounts for their employees. They can offer 401(k)’s,
profit sharing plans, or both 401(k) and profit sharing plans. The
following is a brief description of the various retirement plans available
for small businesses.
401(k) Plans With Employers: This
retirement account takes its name from the IRS code. It was enacted
into law in 1978 to allow taxpayers a break on deferred income. These
contributions reduce the taxable income on the year end W-2. Here are
some highlights of a 401(k) plan:
1. Employees can elect to defer up to $17,500
of their compensation for 2013.
2. Employees who are age 50 or older at the end of the year, can elect to
defer an additional catch-up contribution of $5,500 of compensation.
3. An employee can have several employers and several contribution plans,
but they can only contribute the maximum amount collectively adding all the
plans together.
4. An employer may make a matching contribution for an employee who
contributes to this retirement plan.
5. The set-up of the account and contributions must be done by December
31st.
6. The employer contributions must be made by the return due date including
extensions.
401(k) Plans For Individuals: A 401(k)
plan for an individual, also known as the solo 401(k), is strictly for sole
proprietors who have no employees (although your spouse may contribute if
he or she earns income from the business). The solo 401(k) works much
the same as traditional 401(k) plans offered by companies, as well as SEP
IRAs designed for the self-employed. As an employee, you can defer
$17,500 of compensation for 2013, and as an employer you can contribute as
much as 20% of compensation. The contributions can be made up to
April 15th, but the account must be opened before December 31st of the
previous year. They can be more complicated than other IRA
options. If you have at least $250,000, you will need to report the
benefits through IRS Form 5500 annually.
Self-Employed Profit Sharing Plan (SEP):
Anyone with self-employment (SE) income can set up a Self-Employed Profit
Sharing Plan. The maximum contribution allowed is 25% of net SE
income after SE tax deduction up to a maximum contribution of $ 51,000 for
2013. You can contribute to this retirement plan by April 15th for
the previous tax year, unless you file an extension and are then allowed to
contribute until Oct 15th or the time you file your tax return. This
plan is mostly used when the business only has the owner (and spouse) and
no employees.
Simple IRA: Savings Incentive
Match Plan for Employees (SIMPLE) can be a good solution for many small
businesses. They are easy to set up, affordable and have simple year
end paperwork. In 2013, employees can contribute up to $12,000 plus a
catch up amount for employees that are older than 50. Employer’s
matching amounts range from 1-3 percent of the total pay. Simple IRA
contributions do count against the limit for your 401(k), limiting the
overall options. You have to open the account by October 1st to make
contributions for that year.
FOR
INDIVIDUALS: Individuals can also contribute to their
retirement. Below is a list of IRA choices. Please note that
there are income limitations.
Traditional IRAs: Traditional IRAs
allow you (or your spouse, if you file a joint return) to make tax
deductible contributions to a traditional IRA. Contributions and
earnings on the traditional IRA will not be taxed until they are
distributed. Here are some facts regarding traditional IRA’s:
 •The maximum contribution to your
traditional IRA for 2013 will be the smaller of $5,500 or your taxable
compensation for the year.
•If you are age 50 or older before 2014, you may make an additional
catch-up contribution of $1,000.
•You can make traditional IRA contributions up to the age of 70 ½. If
you file a joint return with your spouse, only one of you needs to have
compensation to contribute to a traditional IRA.
•For 2013, if you are covered by a retirement plan at work, your deduction
for contributions to a traditional IRA is reduced (phased out) if your
modified AGI is more than $59,000 if you are single and more than $95,000
if you are married.
•If your spouse is covered by a retirement plan at work, but you are not,
your deduction is phased out if your modified AGI is more than
$178,000. If your modified AGI is $188,000 or more, you cannot take a
deduction for contributions to a traditional IRA.
•Contributions to your IRA must be made by the return due date, typically
April 15th of the following year.
•You must generally start receiving required minimum distributions from
your traditional IRA by April 1st of the year following the year in which
you reach age 70 ½. The required minimum distribution for any year after
the year you turn 70 ½ must be made by December 31st of that later year.
Roth IRAs: A Roth IRA is an
individual retirement plan that is subject to many of the rules that apply
to a traditional IRA, but, unlike a traditional IRA, you cannot deduct
contributions to a Roth IRA, but, if you satisfy the requirements,
qualified distributions are tax-free. Contributions can be made to
your Roth IRA after you reach age 70 ½ and you can leave amounts in your
Roth IRA as long as you live. The maximum contribution amount and
catch up amounts are the same for the Roth as they are for the Traditional
IRA. If your modified AGI is $188,000 or more you cannot make a Roth
IRA contribution.
Did You Know?
 •You can deduct
the transportation costs in travel if your trip is 51%
business and 49% personal.
•Before efiling your company's tax return, make sure your 1099 income matches
your tax return! If it does not, expect a letter from
the IRS!
•Registration
fees to DMV are deductible. Watch out that you do not
give the total amount paid; it is only the license fee that is
deductible.
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