Plan op­tions for the self-em­ployed

The Morning Call - - BUSINESS CYCLE - Jill Sch­lesinger Jill on Money Jill Sch­lesinger, CFP, is a CBS News Busi­ness An­a­lyst. A for­mer op­tions trader and CIO of an in­vest­ment ad­vi­sory firm, she wel­comes com­ments and ques­tions at [email protected]­lon­money.com.

I am of­ten asked about the best re­tire­ment plans out there for the self-em­ployed. The “starter” plan is usu­ally an In­di­vid­ual Re­tire­ment Ac­count. But there are other op­tions to con­sider:

Sim­pli­fied Em­ployee Pen­sion (SEP-IRA): Geared to­ward those who have up to 25 em­ploy­ees and want to of­fer a re­tire­ment ben­e­fit that is easy to op­er­ate.

Con­tri­bu­tion Limit: The lesser of: 25% of your net earn­ings from self-em­ploy­ment (net profit less half of your self-em­ploy­ment taxes paid and your SEP con­tri­bu­tion), up to $56,000 for 2019, with a $280,000 limit on com­pen­sa­tion.

Tax De­ductibil­ity: To qual­ify, com­plete IRS Form 5305-SEP, or an IRS-ap­proved “pro­to­type

SEP plan,” of­fered by many fi­nan­cial in­sti­tu­tions and by plan ad­min­is­tra­tion com­pa­nies.

Con­tri­bu­tion Dead­line: You can es­tab­lish and fund the SEP plan as late as the due date (in­clud­ing ex­ten­sions) of your in­come tax re­turn for that year.

Pros: Avail­able to any size busi­ness; low cost; no fil­ing

re­quire­ment for the em­ployer; and open to all el­i­gi­ble em­ploy­ees.

Cons: Only the em­ployer con­trib­utes, so the bur­den is on your shoul­ders alone; con­tri­bu­tion per­cent­ages must be equal to the ones you make for your­self, which can add up. There is no Roth ver­sion of a SEP IRA. Sav­ings In­cen­tive Match Plan for Em­ploy­ees (SIM­PLE IRA Plan): Best for those with up to 100 em­ploy­ees.

Con­tri­bu­tion Limit: Net earn­ings from self-em­ploy­ment up to $13,000 in 2019, plus an ad­di­tional $3,000 if you’re 50 or older. There is also an em­ployer con­tri­bu­tion of ei­ther a 2% fixed or a 3% match­ing. The com­pen­sa­tion limit for fac­tor­ing con­tri­bu­tions is $280,000 in 2019.

Tax De­ductibil­ity: Es­tab­lish the plan by com­plet­ing Form 5305-SIM­PLE, Form 5304SIMPLE, or an IRS-ap­proved “pro­to­type SIM­PLE IRA plan” of­fered by many fi­nan­cial in­sti­tu­tions and by plan ad­min­is­tra­tion com­pa­nies. Con­tri­bu­tions made to em­ployee ac­counts are de­ductible as a busi­ness ex­pense.

Con­tri­bu­tion Dead­line: You can es­tab­lish a SIM­PLE IRA plan at any time Jan­uary 1 through Oct. 1. If you be­came self-em­ployed af­ter Oct. 1, you can set up a SIM­PLE IRA plan for the year as soon as ad­min­is­tra­tively fea­si­ble af­ter your busi­ness starts.

Pros: Em­ploy­ees can con­trib­ute through salary de­fer­ral; less

pa­per­work and test­ing than a stan­dard 401(k).

Cons: Em­ploy­ers are re­quired to make con­tri­bu­tions; there is an early with­drawal penalty of 25% if par­tic­i­pants with­draw within the first two years of par­tic­i­pa­tion in a SIM­PLE IRA. Solo 401(k) plan: Geared to those who have no em­ploy­ees (other than a spouse) and have the ca­pac­ity to sock away a lot of dough.

Con­tri­bu­tion Limit: Salary de­fer­rals up to $19,000 in 2019, plus an ad­di­tional $6,000 if you’re 50 or older, ei­ther on a pre-tax ba­sis or as des­ig­nated Roth con­tri­bu­tions. You can add an­other 25% of your net earn­ings from self-em­ploy­ment for to­tal con­tri­bu­tions of $56,000 for 2019. The limit on com­pen­sa­tion that can be used to fac­tor your con­tri­bu­tion is $280,000 in 2019.

Con­tri­bu­tion Dead­line: Plan must be es­tab­lished be­fore cal­en­dar year end and fund­ing al­lowed up to tax fil­ing dead­line (in­clud­ing ex­ten­sions).

Pros: You may be able to put more money into a 401(k) than a SEP due to the way the con­tri­bu­tion lev­els are cal­cu­lated.

Cons: More pa­per­work than a SEP.

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