According to the Social Security Administration the average retirement benefit paid is only $1,269 per month. Today’s life expectancy is more than 85 years old and 34% of the workforce has no savings set aside specifically for retirement. Will you be ready for retirement? Whether you are entering the workforce or at the height of your career, saving for retirement is a must. At Akin, Doherty, Klein & Feuge, P.C. (ADKF) we have found that these are amongst some of the most popular options: Individual Retirement Accounts (IRA) Both Roth and Traditional IRA’s are two of the most common retirement accounts. For 2013, an individual with earned income can contribute up to $5,500, $6,500 for individuals over 50. Traditional IRA contributions are normally tax deductable, but taxable at time of withdrawal whereas Roth accounts are non-deductible, but also non-taxable at the time of withdrawal including the income accumulated within the plan. The deduction may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain thresholds. (Over $59,000 Single, over $95,000 Married filing joint) Even though Roth accounts are not as popular as traditional, if you are likely to benefit more from tax-free withdrawals later than from tax savings now, a Roth IRA or Roth 401(k) may be the better choice. IRA contributions must be made by April 15, 2014, require very little paperwork and have no annual filing requirement. Simplified Employee Pension Simplified Employee Pension’s (SEP) allow for employer only contributions, but are available to all size businesses, including sole proprietors. SEP’s allow for much larger contributions than IRA’s. If chosen to be made, contributions for eligible employees cannot exceed the lesser of 25% of the employee’s compensation or $51,000. Contributions are based on a percentage of each eligible employee’s compensation. SEP’s must be set up and funded by the due date of your 2013 business tax return (including extension) in order to take the deduction for 2013. SEP’s require minimal paperwork and no annual filing requirement. 401(k) Plans 401(k) plans allow for employee elective salary deferrals. Employers can make deductible contributions and withdraws are taxable at retirement. The employee contribution limit for 2013 for a traditional 401(k) plan is $17,500, $12,000 for Simple (Savings Incentive Match Plan) 401(k) plan. Individuals over 50 are allowed to make catch-up contributions, $5,500 to traditional and $2,500 for Simple. All required employer contributions are 100% vested for Simple plans, but traditional plans can be designed to become vested over time. 401(k) traditional plans are generally more expensive to maintain and require annual filings with the Internal Revenue Service. One-Participant 401(k)plans, also called Solo 401(k), are similar to SEP’s, however, Solo-401(k)’s allow for larger contributions simply because of the way the annual contribution is calculated. The maximum contribution is still $51,000 with catch-up contributions allowed, however with Solo-401(k)’s you can get to the limit more easily or with a smaller amount of income by making both employee elective deferrals and employer non-elective contributions. For example, a self-employed individual with earnings of $100,000 under a SEP account can contribute $25,000 (25% of 100,000). Under a Solo-401(k) plan, the same person can contribute an employee contribution of $17,500 and employer contributions of $25,000(25% of 100,000). In this example, the maximum allowed is $17,500 more. For someone in the right situation, this employer match can be a huge advantage and even greater advantage for married individuals. An additional advantage is that loans are allowed out of Solo-401(k)’s, whereas they are not allowed out of SEP’s. Unfortunately, with the pro’s come the con’s. These plans do come with much greater administrative responsibilities such as the annual filings. For new employees joining the workforce time is on your side, but you must take advantage now. Most retirement contributions are due by April 15th with some extension exceptions. Right now is the perfect time to consider which retirement account is best for you and the CPAs at ADKF would be glad to assist you in the process. Please feel free to contact us anytime at 210-829-1300.
