Year End Retirement Deductions
The clock continues to tick. Your retirement is one year closer.
You have time before December 31 to take steps that will help you fund the retirement you desire.
Before you read on, I must stress we are not financial planners. These are just suggestions on how to get the most out of your business and retirement. Please speak to your Financial Planner, for the nitty gritty about your retirement. If you don’t have one, we suggest getting one you can trust. Your retirement is not something you should wait on.
Big Picture
Here are the four opportunities we explain in this article:
1. Establish Your 2020 Retirement Plan
First, a question: do you have your (or your corporation’s) retirement plan in place?
If not, and if you have some cash you can put into a retirement plan, put that retirement plan in place so you can obtain a tax deduction for 2020.
As an owner-employee, you are both an employee and the employer, that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.
In general, your plan document will define when you can make employee or employer contributions that will produce 2020 tax deductions. Make sure you know exactly when you can make (a) employer contributions and (b) employee contributions.
2.Claim the New, Improved Retirement Plan Start-Up Tax Credit of Up to $15,000
Two questions:
Are you the solo worker in your business?
Is your retirement plan in place?
If you answered no to both questions, consider this:
By establishing a new qualified retirement plan you can qualify for a non-refundable tax credit that’s the greater of $500 or the lesser of (a) $250 multiplied by the number of your non-highly compensated employees, or (b) $5,000.
The credit is based on your “qualified start-up costs”:
The credit applies to the year of start-up and for the next two years (capped at $5,000 a year, or $15,000 maximum). You may deduct any costs in excess of the tax credit as ordinary and necessary expenses.
3.Claim the New Automatic Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)
The SECURE Act added a nonrefundable credit of $500 per year for up to three years with the first taxable year beginning in 2020 or later in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE plan.
The new $500 auto contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans.
As with the start-up credit above, you are an employer eligible for the credit if, for the preceding year,
- you had no more than 100 employees, each with compensation of $5,000 or more, and
- your plan had at least one employee eligible to participate who is not a highly compensated employee.
The solo business operator with no employees is not eligible for the automatic enrollment credit. (Sorry!)
4. Convert to a Roth IRA
Consider converting your 401(k) or traditional IRA to a Roth IRA.
The Roth IRA over its lifetime can produce financial results far superior to the traditional retirement plan.
Again not a financial planner, these are just suggestions.
You first need to answer this question: How much tax will I have to pay now to convert my existing plan to a Roth IRA? Basically can you afford to pay the taxes by converting?
Here are four reasons you should consider converting your retirement plan to a Roth IRA:
- You can withdraw the monies you put into your Roth IRA (the contributions) at any time, both tax free and penalty-free.
- You can withdraw the money you converted from the traditional plan to the Roth IRA at any time, tax-free.
- Caveat: if you withdraw within five years, you pay a 10 percent penalty.
- When you have your money in a Roth IRA, you pay no tax on qualified withdrawals (earnings), which are distributions taken after age 59 1/2.
- Unlike with the traditional IRA, you don’t have to receive required minimum distributions from a Roth IRA when you reach age 72—or to put this another way, you can keep your Roth IRA intact and earning money until you die.
Here are four reasons keeping your money in a traditional retirement plan or IRA (versus the Roth IRA) can cost you:
- You’ll generally pay tax and a 10 percent penalty on withdrawals before age 59 1/2.
- You could owe big taxes when you withdraw your money from your traditional IRA.
- Before the SECURE Act, you had to take distributions at the youthful age of 70 1/2, Now, you can wait to the ripe old age of 72. Once you turn age 72, the law requires you to start taking out money annually—even if you don’t need it or want it.
- If you die and leave a traditional IRA to your heirs, they could owe big taxes on the accumulated monies as they take the money from the inherited IRA.
The Long and short of it…
Having a retirement plan is a good money strategy for most business owners because it creates savings that you are unlikely to tap and that enable compound tax-free (Roth) or tax-deferred growth.
Get your plan in place before December 31.
As the business owner, can make both employer and employee contributions.
If you have employees, make sure to take advantage of the tax credits for (a) start-up of the plan and (b) establishing automatic contributions (opt-outs are available, of course).
Seriously consider converting your existing accumulations to a Roth IRA.
The long-term savings here can be huge. Make sure to leave the converted funds in the Roth for at least five years.
Again for the Third time we are not financial planners, this is just suggestions on how to help you and your business.
For more information on this article and many more to help your business grow contact us!