by Peter Prescott
Choosing a retirement plan is one of the most difficult, and critical, questions that I answer as a CPA and Wealth Adviser as there are many ways to maximize your retirement benefits and create important tax savings.
401(k) vs. IRA
If there is no matching contribution by your employer, consider just using a Traditional or Roth-IRA if you want to contribute $6,500 or less. You can decide if you want to invest pre-tax or after-tax when you know your actual tax bracket prior to filing your returns. Additionally, you have a much wider array of investment options.
Pre-Tax Contribution (IRA’s or Retirement Plans) or After-Tax Roth?
At 25% or higher tax bracket, the pre-tax contribution makes most sense. At 15%, a Roth-IRA would be appropriate. Investors around 30 or under may want to consider the tax-free Roth IRA, even if they are in a 25% bracket.
Making Higher Contributions Beyond IRA Limits
If you can afford to exceed IRA contribution limits ($5,500 – $6,500 in 2016), consider maximizing contributions to your company retirement (maximum $18,000 deductible for 2016, plus an extra $6,000 for those 50 or older).
Self-Employed Retirement Plans
Always consider your tax bracket, the number of eligible employees, age, salary levels and consistency of company profitability prior to selecting a plan. Many pension plans need to be established prior to year-end at December 31st. Therefore, action now is important. Once the plan has been properly established, you can fund the retirement plan as late as September 15th or October 15th in 2017 (the extended due date of your business tax return).
Single K Plans
A good choice when there are no employees or only family members as employees. You can contribute 100% of net income up to $18,000 to $24,000 for each participant. This can be combined with an Employer Profit Sharing contribution for a maximum total contribution of $53,000 to $59,000 for tax year 2016. A plan can be established for as little as $20 per year for administrative costs. This is a better alternative to a SEP-IRA since 401(k) plans almost always allow higher contributions, have a loan provision and give you the opportunity to contribute on a pre-tax or after-tax basis.
Can be used by individuals, Sub-S or C corporations. Maximum contributions can reach $53,000 to $59,000 for 2016. Added advantage of delaying payment of contributions until extension deadlines (October 15th for individuals or September 15th for S and C corporations). This gives you use of the deduction savings for up to 9.5 months before out-of-pocket contributions. The main benefit of a SEP-IRA is that you do not have to set them up by year-end. You can establish this account as late as the extended due date of the tax return in 2017.
Defined Benefit Plans
For high earners who can afford to sock away a good chunk of money, consider a Defined Benefit Plan that could enable you to contribute up to $210,000 in a single year. Older owners benefit the most. Defined Benefit Plans can also be paired with a 401(k) plan.