Retirement Accounts - Explained
Retirement accounts can be confusing for small business owners. You see, while there's a little chance of financial mobility in corporate life, there's also a sense of safety and security. You know that in case you relapse or need financial assistance of any kind, you have a finance department to go to. Besides your income, you may get plenty of bonuses and incentives that can go towards your retirement savings. You also get a retirement check when you leave the office, so it's pretty much settled.
On the other hand, being a small business owner means you have all the chances to acquire as many financial achievements as possible. Investments, expansion, downsizing, it's all in your hands. However, you don't have another authority to rely on in case you're stuck with little money. You're not the employee; you're an employer yourself. You have to arrange for everything on your own, from the beginning to the end.
So, when we talk about retirement planning, keep in mind that this is something that’s especially important for those who are self-employed. Business owners need retirement accounts as well as the services of a CPA in order to manage their business alongside retirement savings.
As a business owner, you're most probably aware of the accounting procedures and taxes that apply to your earning. Based on the type of business you run, the time you have till retirement, and the amount you wish to save, here are some best retirement account plans for small businesses.
TRADITIONAL OR ROTH IRA
WHY GO FOR AN IRA?
Individual Plans always seem to give you maximum convenience. There are no employee elements included in this plan, so it's all about your retirement savings.
WHEN SHOULD YOU START AN IRA?
If you're about to leave your job to start your business, it's about the right time to set up your IRA account. Simply open an IRA brokerage online and start saving for your retirement.
WHAT IS AN IRA MOST SUITABLE FOR?
Business owners who save less than $6,000 a year can open up an IRA. As someone who just quit their job, you can also contribute your employee 401(k) to the IRA.
ARE THERE ANY LIMITATIONS?
With an IRA, you can deposit up to $6,000 a year. However, if you're 50 or older, you might be able to score a few incentives.
WHAT TAXES DO TRADITIONAL AND ROTH IRA HAVE?
With a traditional IRA, you will have deductions on contributions you make to the IRA, but there aren't any deductions on Roth IRA. During retirement, your withdrawals also tax-free.
If you're planning on saving big, you can go for a Solo 401(k) plan in case you don't have any employees.
WHY GO FOR A SOLO 401(K)?
With a Solo 401(k), your contribution limit increases, allowing you to save more for retirement.
WHAT IS THE CONTRIBUTION LIMIT ON A SOLO 401(K)?
With a Solo 410(k), you can contribute up to $57,000 (2020 Limit) of your savings, or 100% of your earned income, whichever is lower. There is also a $6,000 catch-up for those who aged fifty and over.
WHAT ARE THE TAX DETAILS?
A Solo 401(k) is similar to the one that's offered by employers at jobs. All contributions are pre-tax, and distributions after 59 years and six months of age are taxed.
You can also go for a Roth Solo 401(k), which has the tax criteria similar to a Roth IRA. However, the contribution limit for a Roth Solo 401(k) may be limited.
HOW DO YOU OPEN UP A SOLO 401(K)?
You can start a Solo 401(k) via online brokerages. To activate the account, you'll need to file paperwork with the IRS once you have $250,000 in your account.
A SEP IRA is designed for self-employed people with no or very few employees.
WHY GO FOR A SEP IRA?
A SEP IRA is extremely flexible and has contribution limits similar to those of a Solo 401(k). Moreover, it has a low administrative burden and much less paperwork required. You don't need to make any regular contributions, either. However, the SEP-IRA doesn't have a Roth version.
WHAT IS THE CONTRIBUTION LIMIT?
The lesser of $57,000 in 2020 ($56,000 in 2019) or up to 25% of compensation or net self-employment earnings, with a $285,000 limit on compensation that can be used to factor the contribution. There are no contribution catch-ups for people above 50 years of age.
WHAT IS THE EMPLOYEE ELEMENT IN SEP IRA?
Employers must contribute an equal percentage of the salary of each eligible employee as compensation. The employer is also counted as an employee.
DEFINED BENEFIT PLAN
A defined benefit plan helps you establish a means of your own pension once you retire. In a way, you remain an employer prior to retirement and become an ex-employee once you're retired.
WHY GO FOR A DEFINED BENEFIT PLAN?
Defined benefit plans are excellent for people who wish to save a lot for their retirement. They may want to include investment factors as well.
WHAT IS THE CONTRIBUTION LIMIT?
One of the best features of defined benefit plans is that there isn't a defined limit of contribution. Based on how much you're earning, your age, and your expected investment returns, you can calculate your defined benefit contributions.
WHAT IS THE EMPLOYEE ELEMENT IN SEP IRA?
In a defined payment plan, you can offer these plans to employees and make contributions on their behalf.
HOW TO GET STARTED?
Unlike other retirement accounts, there are very limited brokerages who offer a defined benefit plan.
If you are interested in getting started, we work with several financial planning professionals in the area who would love to discuss your options with you. Please reach out to Josh Hall at Josh.Hall@HallAcctCo.com or Jeremy Hall at Jeremy.Hall@HallAcctCo.Com for more information. From tax filing strategies to tips on bookkeeping and accounting, we’ve got you covered.
FUTURE IMPORTANT DEADLINES02/01/21
Deadline for employers to mail out W-2 Forms to their employees and for businesses to furnish 1099 Forms reporting non-employee compensation, bank interest, dividends, and distributions from a retirement plan
Deadline for businesses to mail Forms 1099 and 1096 to the IRS
Deadline for S-Corporate tax returns (Form 1120-S) for tax year 2020, or to request an automatic six-month extension of time to file (Form 7004) for S-Corporations that use the calendar year as their tax year, and for filing Partnership tax returns (Form 1065) or to request an automatic six-month extension of time to file (Form 7004)
Deadline for businesses to e-file Forms 1099 and 1096 to the IRS, except Form 1099-NEC
Deadline to file individual tax returns (Form 1040) for the tax year 2020 or to request an automatic extension (Form 4868) for an extra six months to file your return, and for payment of any tax due, and for Deadline for corporate tax returns (Forms 1120 and 1120-A) for tax year 2020, or to request an automatic six-month extension of time to file (Form 7004) for corporations that use the calendar year as their tax year
Deadline for household employers who paid $2,200 or more in wages in 2020 to file Schedule H for Form 1040
Deadline for first-quarter estimated tax payments for the 2021 tax year
Deadline for second-quarter estimated tax payments for the 2021 tax year
Deadline for third-quarter estimated tax payments for the 2021 tax year
Deadline for S-Corporate tax returns (Form 1120-S) for tax year 2020 for S-Corporations that use the calendar year as their tax year, and for filing Partnership tax returns (Form 1065)
Final extended deadline to file individual tax returns for the year 2020 (Form 1040), and for Deadline for corporate tax returns (Forms 1120 and 1120-A) for tax year 2020 for corporations that use the calendar year as their tax year