For the most part, the 2013 tax season is behind us, and we can now turn our attention to 2014 and beyond. And as we focus on the future, now is a very good time to review your retirement plans to ensure you are maximizing contributions and receiving the maximum tax benefit.
Plan of your contributions
The small business owners I work with tend to put so much effort in and are so focused on their business that they can sometimes neglect planning for their personal financial future. If you haven’t already, I want to encourage you to take advantage of the 401(k)’s designed specifically for sole proprietors and small business owners. Remember, contributions not only build your retirement nest egg but also deliver tax advantages.
The window of opportunity to maximize retirement and other special-purpose plan contributions for 2013 has, for the most part, closed. However, if you have an SEP-IRA, you can still make 2013 contributions up to the due date of your return, including extensions. That means funding of an SEP-IRA for 2013 may occur up to October 15, 2014, as long as you have been granted an extension to that date. For 2013, you can contribute up to 25 percent of net earnings derived from your business or a maximum of $51,000. That number increases to $52,000 for 2014.
If you are a sole proprietor and don’t plan on hiring any employees, you may want to consider a Solo 401(k) Plan often referred to as a Solo-(k), Uni-(k) or One-participant-(k). This plan has generated interest among many small business owners, mostly for its higher contribution levels.
The one-participant 401(k) plan is not a new type of 401(k) plan. It is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.
Contribution Limits in a one-participant 401(k) plan.
Business owners wear two hats in a one-participant 401(k) plan: employee and employer. You can make contributions to the scheme in both capacities.
- Employer nonelective contributions up to 25% of compensation as defined by the plan and
- Elective deferrals up to 100% of set-off (“earned income” in the case of a self-employed individual) up to the annual contribution limit which is $17,500 or $23,000 if over age 50
For 2014, the maximum contribution to a Solo 401(k) is the sum of: (A) up to 25% of compensation, and (B) salary deferral up to $17,500 ($23,000 if over 50 years of age). The total of A and B can’t exceed $52,000 or 100% of compensation.
For self-employed individuals, there are unique contribution rules. If you are self-employed, you must follow special computation rules to determine the maximum amount of elective deferrals and non-elective contributions that you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:
- one-half of your self-employment tax, and
- contributions for yourself
The IRS provides information and worksheets to help figure your maximum contribution and tax deduction, but it can get a little complicated. If you have any questions about figuring your maximum contribution or the tax benefits, please contact me.