Retirement planning is essential not only for personal financial planning, but tax planning as well. Even though the 2013 calendar year is over it is not too late to plan for the future and get a tax benefit along the way! Taxpayers have until April 15, 2014 or even October 15, 2014 if an extension is filed to make contributions to a SEP, traditional or Roth IRAs.
The SEP IRA is a retirement plan designed for self-employed individuals and small business owners. Sole proprietors, S Corporations, partnerships and LLCs can all use this type of plan. The appeal is that these plans can be set up by a one person business or a business with employees. SEP IRA contributions cannot exceed the lesser of 25% of an employee’s compensation or $51,000 for 2013. This is a simplified explanation of this type of plan, but the key point is that they can be set up and contributions made after year end.
Traditional IRA contributions can be made if there is taxable compensation on the tax return and taxpayers are under the age 70 1/2. Taxpayers can contribute up to $5,500 or $6,500 if age 50 or older by the end of the year. Traditional IRA contributions are fully tax deductible if there is no retirement plan provided by the taxpayer or spouse’s employer. The deduction may be limited if covered by en employer retirement plan and income exceeds certain limits.
Roth IRAs contributions can be made at any age as long as taxable compensation exists and income does not exceed certain limits. To be able to contribute the maximums (the same as a traditional IRA – $5,500 or $6,500 if age 50 or older by the end of the year) adjusted gross income must be less than $178,000 if married filing jointly and less than $112,000 if single or head of household. Roth IRAs are not deductible on your tax return, but withdrawals at retirement age are not taxable as long as it is a qualified distribution.
Although retirement planning is important, be sure to not contribute in excess of what is needed for yearly expenses. Unexpected medical or other life events can occur requiring the need for funds immediately. Taking an early distribution of retirement funds before you are 59 ½ will result in the amount being included in taxable income plus a 10% additional tax.
Even in a simplified explanation there are many options and the rules can be complicated. With the uncertainty of social security and rising costs of healthcare expenses retirement planning is more important now than ever. We recommend consulting your tax advisor or CPA on options to help gain the peace of mind that comes with proper savings for a long and happy retirement!