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Retirement Plan Options for the Self-Employed - while there's still time

On Thursday evening Russ and I had a great time discussing the individual needs of business owners related to retirement planning. For some, there is still time to fund a plan and get a tax deduction for last year. Read on...

There are lots of reasons for implementing and funding a retirement plan. What is YOUR reason?

*Tax deferral of contribution?
*Tax deferred growth?
*Tax free growth?
*Provide funds for retirement?
*Protect assets from creditors?

 Once you know the main reason you want to implement a plan there are several other considerations, such as:

*Annual contribution (deferral) limit
*Annual contribution requirement
*Whom else must I contribute for? Qualified retirement plans must NOT discriminate in favor of owners or highly compensated employees.
*Cost of administration
*Growth opportunity – investment choices
*Funding by employer or employee?
*Timing of contribution v deduction
*Liquidity (ability to borrow from plan)

Keep your reasons for implementing and your most important considerations in mind as you evaluate your choices.

*IRA – Traditional
*IRA – Roth
*SEP IRA
*SIMPLE IRA
*SIMPLE 401(k)
*Safe Harbor 401(k)
*Other Defined Contribution Plan
*Defined Benefit Plan (i.e. 412(e) annuity plan)

*** and don’t forget to max your HSA by April 17, 2018 if you have a high-deductible health insurance policy***

If the title of your plan has "IRA" in it, then it is not legally considered a retirement plan that is protected from creditors. If protection from creditors is one of your main decision points, skip ahead to 401(k)s. Some basic information about each of your choices is outlined below.

Traditional IRA

2017
*$5,500 contribution limit ($1,000 catch-up if over 50 years old)
*Deductibility phased out if covered by retirement plan
*Growth is tax deferred
*Low cost of administration
*Investment choices determined by custodian
*Contribute by 4/17/2018 to get 2017 deduction
2018
*$5,500 contribution limit ($1,000 catch-up)

Roth IRA

2017
*$5,500 contribution limit ($1,000 catch-up)
*No tax deduction when contributions are made; contributions phased out
*Growth is tax free; distributions at retirement are tax free
*Low cost of administration
*Investment choices determined by custodian
*Contribute by 4/17/2018 for 2017
2018
*$5,500 contribution limit ($1,000 catch-up)

SEP IRA (simplified employee pension)

2017
*$54,000 contribution limit (funded by employer)
*Growth is tax deferred
*Non-discrimination requirement
*Investment choices determined by custodian
*Contribute by 4/17/2018 for 2017
2018
*$55,000 contribution limit (funded by employer)

SIMPLE IRA (savings incentive match plan for employees)

2017
*$12,500 employee contribution limit ($3,000 catch-up)
*Growth is tax deferred
*Employer contribution is required (match or non-elective)
*Relatively low administrative costs
*Investment choices determined by custodian
*Contribute by 4/17/2018 for 2017
2018
*$12,500 employee contribution limit ($3,000 catch-up)

SIMPLE 401(k)

2017
*$12,500 employee contribution limit ($3,000 catch-up)
*Growth is tax deferred
*Employer contribution is required (match or non-elective)
*Relatively low administrative costs compared to safe harbor 401(k), but higher than SIMPLE IRA
*Investment choices determined by custodian
*Too late to contribute for 2017 - 401(k) plan needs to be established by October 1 of its first year
2018
*$12,500 employee contribution limit ($3,000 catch-up)

Safe Harbor 401(k) (safe harbor ensures compliance with non-discrimination rules)

2017
*$18,000 employee contribution limit ($6,000 catch-up)
*Growth is tax deferred for traditional, tax free for Roth contributions if allowed by the plan
*Employer contribution is required (match or elective)
*Moderate administrative costs
*Investment choices determined by custodian
*Too late to contribute for 2017
2018
*$18,500 employee contribution limit ($6,000 catch-up)

Other Defined Contribution Plans (profit sharing plans, money purchase plans, pension plans)

2017
*Employer contributions only – limited to 20% of owner compensation, $54,000 maximum (based on maximum compensation of $270,000)
*Employer has ability to set vesting requirements
*High cost of administration
*Too late to set up for 2017
2018
*$55,000 maximum (based on maximum compensation of $275,000)

Defined Benefit Plans (pension plans, Section 412(e) annuity plans)

2017
*Employer contributions only – required as determined by actuary (highest deductible contribution)
*Annual benefit limit $215,000
*High cost of administration
*Too late to set up for 2017
2018
*$220,000 benefit limit

Now that you've waded through the list of options, how do you decide which one is right for you? We put together a comparative table to help you decide.

Which plan is right for ME?
Plans for 2017, age 50 or over EE Cont ER Cont Cover others? Admin Cost Growth is tax
IRA Traditional $6,500 $- No Low Deferred
IRA Roth $6,500 $- No Low Free
SEP IRA $- up to $54,000 Yes Low Deferred
SIMPLE IRA $15,500 % of comp Yes Low Deferred
SIMPLE 401(k) $15,500 % of comp Yes Low Deferred
Safe Harbor 401(k) $24,000 % of comp Yes Moderate Deferred
Other Defined Contribution $- up to $54,000 Yes High Deferred
Defined Benefit Plan $- Actuarily determined Yes High Deferred

If you would like to discuss your situation, we can help you decide which plan is right for YOU. Give us a call at (801)281-4700. We are Your Accounting and Tax Strategy Advocates and would love to help.


Russ Anderson | 02/10/2018