Are you self-employed? Did you know you have many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans?
Here are highlights of a few of your retirement plan options.
Savings Incentive Match Plan for Employees (SIMPLE IRA Plan)
- You can put all your net earnings from self-employment in the plan: up to $11,500 (plus an additional $2,500 if you’re 50 or older) in salary reduction contributions and either a 2% fixed contribution or a 3% matching contribution.
- Establish the plan:
- Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – for Use With a Designated Financial Institution,
- Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – Not for Use With a Designated Financial Institution, or
- an IRS-approved “prototype SIMPLE IRA plan” offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and
- open a SIMPLE IRA through a bank or another financial institution.
- Set up a SIMPLE IRA plan at any time January 1 through October 1. If you became self-employed after October 1, you can set up a SIMPLE IRA plan for the year as soon as administratively feasible after your business starts.
Simplified Employee Pension (SEP)
Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $49,000.
- Establish the plan:
- Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement, or
- an IRS-approved “prototype SEP plan” offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and
- open a SEP-IRA through a bank or other financial institution.
Set up the SEP plan for a year as late as the due date (including extensions) of your income tax return for that year.
- Make salary deferrals up to $16,500 (plus an additional $5,500 if you’re 50 or older) of your compensation from the business either on a pre-tax basis or as a designated Roth contribution.
- Contribute up to an additional 25% of your net earnings from self-employment (not including contributions for yourself), up to $49,000 including salary deferrals.
- Tailor the plan to allow you access to the money in the plan through loans and hardship distributions.
- A one-participant 401(k) plan is sometimes referred to as a “solo-401(k),” “individual 401(k)” or “uni-401(k).” It is generally the same as other 401(k) plans, but because there are no other employees, other than the spouse, that work for the business, it is exempt from discrimination testing.
Other Defined Contribution Plans
- Profit-sharing plan: allows you to decide how much to contribute on an annual basis, up to 25% of compensation (not including contributions for yourself) or $49,000.
- Money purchase plan: requires you to contribute a fixed percentage of your income every year, up to 25% of compensation (not including contributions for yourself), according to a formula stated in the plan.
Traditional pension plan with a stated annual benefit you will receive at retirement, usually based on salary and years of service.
Benefit may also be defined based on a cash balance formula in a hypothetical individual account (a cash balance plan).
Maximum annual benefit can be up to $195,000.
Contributions are calculated by an actuary based on the benefit you set and other factors (your age, expected returns on plan investments, etc.); no other annual contribution limit applies.
Retirement plans for self-employed people were formerly referred to as “Keogh plans” after the law that first allowed unincorporated businesses to sponsor retirement plans. Since the law no longer distinguishes between corporate and other plan sponsors, the term is seldom used.
Dollar figures are for 2011 and are subject to annual cost-of-living adjustments.
- Self Directed Brokerage Accounts (401k-plan-blog.com)
- SBO 401K for Partnership Businesses: Easy Method of Making Retirement Contributions (401k-plan-blog.com)
- 100% Contributions with Solo 401k (401k-plan-blog.com)
As you get ready to prepare your 2009 tax return, the Internal Revenue Service wants to make sure you have all the details about tax law changes that may impact your tax return.
Here are the top five changes that may show up on your 2009 return.
1. The American Recovery and Reinvestment Act
ARRA provides several tax provisions that affect tax year 2009 individual tax returns due April 15, 2010. The recovery law provides tax incentives for first-time homebuyers, people who purchased new cars, those that made their homes more energy efficient, parents and students paying for college, and people who received unemployment compensation.
2. IRA Deduction Expanded
You may be able to take an IRA deduction if you were covered by a retirement plan and your 2009 modified adjusted gross income is less than $65,000 or $109,000 if you are married filing a joint return.
3. Standard Deduction Increased for Most Taxpayers
The 2009 basic standard deductions all increased. They are:
- $11,400 for married couples filing a joint return and qualifying widows and widowers
- $5,700 for singles and married individuals filing separate returns
- $8,350 for heads of household
Taxpayers can now claim an additional standard deduction based on the state or local sales or excise taxes paid on the purchase of most new motor vehicles purchased after February 16, 2009. You can also increase your standard deduction by the state or local real estate taxes paid during the year or net disaster losses suffered from a federally declared disaster.
4. 2009 Standard Mileage Rates
The standard mileage rates changed for 2009. The standard mileage rates for business use of a vehicle:
- 55 cents per mile
The standard mileage rates for the cost of operating a vehicle for medical reasons or a deductible move:
- 24 cents per mile
The standard mileage rate for using a car to provide services to charitable organizations remains at 14 cents per mile.
5. Kiddie Tax Change
The amount of taxable investment income a child can have without it being subject to tax at the parent’s rate has increased to $1,900 for 2009.
For more information about these and other changes for tax year 2009, visit IRS.gov.
- FS-2010-4, 2009 Tax Law Changes Provide Saving Opportunities for Nearly Everyone
- The American Recovery and Reinvestment Act of 2009: Information center
- 1040 Central
- Form 1040 instructions (PDF 941K)
IRS YouTube Videos:
- Tax Filing Season 2010 English | Spanish | ASL
- Earned Income Tax Credit English | Spanish | ASL
- Education Credits – Parents English| ASL
- Education Tax Credit-Claim it-Students English | Spanish | ASL
- Energy Tax Credits Claim It English | Spanish | ASL
- Haiti Earthquake Donations English | Spanish | ASL
- Making Work Pay – Claim It English | ASL
- New Homebuyer Credit-Claim It English | Spanish
- New Homebuyer Credit-Military English
- Split Refunds-Savings Bonds English | Spanish
- Unemployment Compensation English | Spanish
- Vehicle Tax Deduction – Claim It English | Spanish | ASL
By Stacie Clifford Kitts, CPA
Did you know that beginning on January 1, 2010, just about anyone will be able to convert (roll your retirement account) to a Roth IRA: Here’s what you can convert:
- • an eligible rollover distribution (ERD) from your or your deceased spouse’s employer-sponsored retirement plan (for example, a 401(k) or a 403(b) plan).
Prior to January 1, 2010, you could only convert to a Roth IRA if your AGI (modified adjusted gross income for Roth IRA purposes) was $100,000 or less and you were not married filing separately.
Also, remember, there will be a tax consequence to your conversion. If you roll over or convert to a Roth IRA, the previously untaxed amounts must be included in your gross income.
However, for tax year 2010, there will be a special 2-year option that will apply to your conversion. Unless you elect to include the entire taxable converted amount in your 2010 income, you can report half in 2011 and half in 2012.
There is still time to make contributions to your traditional Individual Retirement Arrangement, better known as an IRA. Below are the top ten things you should know about money you put aside for retirement in an IRA.
You may be able to deduct some or all of your contributions to your IRA and you also may be eligible for a tax credit equal to a percentage of your contribution.
Contributions can be made to your traditional IRA at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means contributions for 2008 must be made by April 15, 2009.
The amount of funds in your IRA are generally not taxed until you receive distributions from that IRA.
To figure your deduction for IRA contributions, use the worksheets in the instructions for the form you are filing.
For 2008, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts: $5,000 or the amount of your taxable compensation for the year. Taxpayers who are 50 or older can contribute up to $6,000.
Use Form 8880, Credit for Qualified Retirement Savings Contributions, to determine whether you are also eligible for a tax credit.
You cannot deduct an IRA contribution or claim the Credit for Qualified Retirement Saving Contributions on Form 1040EZ; you must use either Form 1040A or Form 1040.
To contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year.
You must have taxable compensation, such as wages, salaries, commissions and tips. If you file a joint return, only one of you needs to have compensation.
Refer to IRS Publication 590, Individual Retirement Arrangements, for information on the amounts you will be eligible to contribute to your IRA account.
Both Form 8880 and Publication 590 can be downloaded at IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).