There are many different retirement plans options available. The most common plans are 401(k), 403(b), and IRAs. 401(k)s are offered to employees by many companies.
There are many different retirement plans options available. The most common plans are 401(k), 403(b), and IRAs. 401(k)s are offered to employees by many companies. For 2018, the maximum contribution an employee can make is $18,500 (or $24,500 if you’re over 50 years old). This amount changes for each tax year. 403(b) plans are generally offered by government or not-for-profit entities, but many of the rules and limits are the same as 401(k) plans. IRAs (Individual Retirement Accounts) are accounts you can open as an individual (not necessarily sponsored by a company). The maximum contribution per year $5,500 (or $6,500 if you’re over 50). There are also contribution limitations based on whether you or your spouse is covered by an employer sponsored retirement plan. There are two IRA plans: Traditional and Roth. The traditional plans are most common, and allow the participant to deduct reduce their taxable income by the amounts contributed. Roth plans do not provide a tax deduction in the current year, but the amounts will grow tax-free and will not be subject to any income tax when distributed after age 59 ½.
Self Employed / Small Business Owner Options
If you are self-employed and own a small business, there are a couple other options available.
First option, is a SIMPLE (Saving Incentive Match Plan for Employees) IRA which are available to companies with fewer than 100 employees and do not maintain any other retirement plans. As an employee, you can contribute up to $12,500 (plus $3,000 if over 50). This deferral option is also available to your other employees. Then, as the employer, there is the option to either match participating employee deferrals up to 3% of total wages, or just contribute 2% of total employee wages (including the non-participants).
Another option is, a SEP (Simplified Employee Pension) plan which are best utilized by self-employed individuals with no employees. Under this plan, a current year deduction is available for the lesser of 20% of self-employment income after the SE tax deduction (half of the SE tax for the current year) or $55,000. This is a large jump from the other plan options and can allow for a large amount to be saved for retirement and for current tax savings.
There are many retirement options to choose from, and this article only highlights the main choices.
*Please note all contribution limits are the amounts for 2018 taxes. Each year these amounts are subject to change
If you want more information on retirement plans or need help with tax preparation, contact our tax professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.