What if you could make $100,000 this year and you’re self-employed business, but only pay tax on $80,000 of it this year?
I often ask this in seminars for real estate agents or other business owners, and typically get a very quizzical look from the group. It’s called deferring income, and it’s not a new idea. But it’s very under-utilized by small business owners.
The IRS has created several special types of retirement accounts that provide enormous tax benefits for those who own a full-time or part-time business. We all know if you set aside money for a traditional IRA you deduct $5000 on your tax return this year. Not only can you deduct the money this year, but it grows tax-deferred until the year (say 2016) you take it out and spend it. But did you know you can deduct $10,000, $20,000 even $50,000 in special retirement plans for the self-employed?
- SEP. This is a turbocharged IRA. You’re not limited to a $5,000 contribution. If you receive the self-employment income you can defer and deduct up to 25% of your net income from self-employment, up to a maximum of $53,000 a year. You have flexibility to contribute a lot or a little — or even nothing — in years when your net income is not as high.
- SIMPLE IRA. If you’re self-employed or have fewer than 100 employees you can set up another type of turbocharged IRA, called a Simple IRA. You will be able to make larger annual contributions — up to 100% of your net income — and also make matching contributions for your employees up to 3% of your net income. The percentage is higher (100%), however, the contribution limit is lower: $12,500 in 2015 and 2016
- SOLO 401(k). We normally think of the 401(k) is being used by larger businesses. However things have changed. Any business owner with no employees can establish a solo 401(k) and make very large contributions– as much is 25% of your net income– up to a maximum of $53,000. But unlike a SEP or simple IRA, you can later borrow from your account, penalty and tax-free, as long as you repay the loan within five years.
ANCHOR ON THIS: Specially designed retirement plans for the self-employed provide for tax advantages and savings not available to regular employees. Know IRS rules, set up your business accordingly, and take advantage of these programs! To learn more, consult IRS publication 560, or contact us
Jim Flauaus, EA