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May Monthly Tips


Retirement Plan Options

There are a variety of retirement plan options available for small business owners and self-employed folks. Each one has its own set of rules. Which option someone picks, and how a particular plan is utilized, can make a big difference in retirement savings. The key is to find the plan that is right for you, and to take advantage of the savings and tax features as much as you can. Retirement plans generally allow for tax-deferred growth of contributions and investment returns (tax free growth for Roth-type plans).

You will also want to clearly define your goals before choosing a plan. For example, do you want:

  • To maximize the amount you can save for your own retirement?
  • A plan funded by employer contributions? Employee contributions? Both?
  • A plan that allows you and your employees to make pretax and/or Roth (after-tax) contributions?
  • The flexibility to skip employer contributions in some years?
  • A plan with the lowest costs? Easiest administration?

Here is a summary of the major retirement plans available to small businesses the self-employed:


– Allows you to set up an IRA (a “SEP-IRA”) for yourself and each of your eligible employees. You can contribute a uniform percentage of pay for each employee, although you don’t have to make contributions every year, offering some flexibility with varying business conditions. SEP plans provide for employer contributions only. Contributions for 2014 are limited to the lesser of 25% of pay or $52,000 for each eligible employee. Most employers, including those who are self-employed, can establish a SEP.

SEPs have low start-up and operating costs and can be established using an easy two-page form.

Caveat – if you start a SEP IRA as a self-employed person (e.g., S Corp. or LLC owner, or sole proprietor) then later hire employees, you must make contributions for all eligible employees (age 21 or older, employed by you for at least 3 of the last 5 years), as well as yourself…because the money you put into a SEP counts as an “employer” contribution.


– Available to employers with 100 or fewer employees. Employees can elect to make pretax contributions in 2014 of up to $12,000 ($14,500 if age 50 or older). Employers much either match your employees’ contributions dollar for dollar – up to 3% of each employee’s compensation – or make a fixed contribution of 2% of compensation for each eligible employee.

SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs are set up for each eligible employee. A financial institution can do much of the paperwork.


– The 401(k) plan has become a hugely popular retirement savings vehicle for small businesses and the self-employed. Employees can make pretax and/or Roth (after-tax) contributions in 2014 of up to $17,500 ($23,000 if age 50 or older). Employers can also make contributions – either matching (typically up to a specified percentage of employee pay) or discretionary profit-sharing contributions. Combined employee and employer contributions can’t exceed the lesser of $52,000 (plus an additional $5,500 if age 50 or older) or 100% of eligible employee compensation.

Note that unless a 401(k) plan is a “safe harbor” variety (involving specified, fully-vested percentages of employee pay contributed by employers), somewhat complicated discrimination testing is required each year.

Note: – “Solo” 401(k) plans are available for the self-employed. However, any employees (if eligible) later hired by the self-employed person must be allowed to participate in a 401(k) plan set up under the self-employed person’s/small business owner’s business (similar to SEP-IRA caveat noted above).

Profit-sharing plan

– Typically, only employers contribute to a qualified profit-sharing plan. Contributions are discretionary – there is usually no set amount you (as employer) need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose (although your contributions must be nondiscriminatory, and “substantial and recurring”). The plan must contain a formula for determining how your contributions are allocated amongst plan participants, and a separate account is established for each participant. Contributions for 2014 can’t exceed the lesser of $52,000 or 100% of employee compensation.

Some varieties of profit-sharing plans can be structured to favor older or highly compensated employees; however, this approach can involve complicated calculations and may require actuarial consulting (though typically less expensive and more flexible than a defined benefit plan).

Defined benefit plans

– Qualified retirement plans that guarantee employees a specified level of benefits at retirement (for example, an annual benefit equal to 30% of final average pay). In 2014, a defined benefit plan can provide an annual benefit of up to $210,000 (or 100% of pay if less). The services of an actuary are generally required, and these types of plans are generally too costly and complex for most small businesses. However, defined benefit plans can be attractive to businesses that have a small group of highly compensated owners who are seeking to contribute as much money as possible on a tax-deferred basis.

I hope you find this information to be helpful. Feel free to forward to anyone who may benefit. Please contact me with any questions, or if you would like to discuss/would like assistance with any personal financial planning topics such as cash flow/budgeting, health care, taxes, insurance, investing, college/retirement planning, estate planning.


March Monthly Tips


Last Minute Tax Planning Tips

Greetings, and Happy Spring (sort of) to everyone! Someday in the hopefully not-too-distant future, the temperature will rise above freezing, snow will melt, flowers will bloom…

But in the meantime, I am pleased to share my Financial Planning Tips email for this month: Last Minute Tax Planning Tips.

As the April 15 tax filing deadline approaches, it can be very advantageous to take last-minute planning steps, and to focus on accuracy and completeness of tax returns and supporting documentation. Below are a few things to consider as you look to wrap up your 2013 taxes:

Money Saving Ideas

Contribute to an IRA or HSA plan

For tax year 2013, you can contribute up to $5,500 ($6,500 if age 50 or older) to an IRA. An IRA can be a great retirement savings vehicle, and anyone can contribute to a traditional IRA. Whether you can contribute to a Roth IRA (where your money grows tax free) depends on your income; contributions by higher income taxpayers to a Roth IRA are limited or not allowed.

Contributions to a traditional IRA may be tax deductible, depending on your income, and whether you participate in an employer’s retirement plan.

NOTE: IRA contributions for 2013 can be made until April 15, 2014.

Health Savings Account (HSA) contributions

If you bought your own health insurance in 2013 and it is HSA-compatible (those of you who attended my Health Care Reform class will know what that means!), you may make a tax-deductible contribution to a HSA account (regardless of how high your income is), which provides tax savings on eligible health care expenses, as well as tax-free growth on earnings (interest, dividends) of HSA funds. 2013 HSA contribution limits are $3,250 for individuals and $6,450 for families. Like IRA contributions, HSA contributions for 2013 can be made until April 15, 2014.

NOTE: The use of HSA accounts should increase significantly in 2014 and beyond because of the Affordable Care Act (“Obamacare”).

Child Care Expenses

If you have kids and you pay for daycare so you can work outside the home, you may be eligible for the Child and Dependent Care Tax Credit. The maximum credit is $3,000 for the first child, or $6,000 for two or more children. The credit amount that any taxpayer is eligible for is highly sensitive to income – the higher your income, the lower the eligible credit. And note with a tax credit, taxes are reduced dollar for dollar, making credits much more valuable than deductions.
So, if you have eligible daycare expenses, don’t miss out on this potentially valuable tax savings benefit!

Check for Donations

For one last-minute tax tip, dig through your bank statements and receipts for any donations you made to charities last year. These donations can really add up, and are often overlooked as tax deductions. Remember, however, that to write off any charitable contributions, you have to itemize. Often, if you own a home, mortgage interest and property taxes (as well as State income taxes) add up to enough to surpass the standard deduction – $6,100 for individuals and $12,200 for a couple married filing jointly in 2013 – and allow you to itemize deductions.

It’s also important to keep good records. Larger charities will typically send you a year-end statement of your deductions, but smaller charities often don’t, so you’ll want to keep a copy of your receipts and/or bank or credit card statements.


Check for Accuracy and Reasonableness

Lastly, it is important to actually read through and check your tax returns and supporting schedules for accuracy and reasonableness before filing. Follow up on any errors or anything that doesn’t look right, e.g., your taxes are much higher than the prior year; your deductions seem too low; your Social Security number is incorrect. With most tax returns now prepared using software, these important steps are often overlooked.

If you are not ready to final your final returns by tax day, consider filing an extension. But be careful – to avoid penalties, you will still have to pay by tax day (April 15 for most people) at least the amount of tax you will ultimately owe…so if you don’t have your final tax liability calculated by tax day, consider making a conservative (high) payment with your extension. It’s better to get a refund back later than to get hit with penalties.

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