Saving Smart for Retirement
Looking for an opportunity to save fore retirement, reduce you current income taxes and benefit from tax-deferred compounded growth? Maximize contributions to retirement plans offered through your employer. If you are self-employed, establish a plan yourself.
How do I take advantage of the benefits of employer-sponsored retirement plans?• Defined-contribution plans, such as 401(k) plans, are common forms of employer-sponsored retirement plans. If you work for an employer who offers such a plan, you may elect to contribute pre-tax income through payroll deductions. The employer often matches these deferred amounts to some extent. In many instances, you can even invest in shares of your employer’s stock. The income earned within the plan is tax-deferred until withdrawn.
Qualified nonprofit organizations, such as public school systems, hospitals and charitable organizations, can sponsor deferred-compensation plans elect to make salary deferral contributions. The employer may also choose to make contributions on your behalf and may match your salary deferral contributions. Contributions to 403(b) plans can be invested in mutual funds, closed-end investment companies or deferred annuity contracts. You can select the investments that best suit your needs, as long as the employer approves the 403(b) provider.
Tax-Planning Strategies to Consider
Generally, you should maximize pretax salary-deferral contributions to your employer’s 401(k) plan, up to $14,000 for 2005 depending on the percentage allowed in the plan. If you are age 50 or over, you can add anadditional $4,000. Doing so defers taxes on both the amounts contributed to the plan and any income earned thereon. If the plan allows, you can borrow from the 401(k) plan if a need arises. Also, withdrawals for certain hardships are permissible (of the plan allows) but taxable.
Maximize salary-deferral contributions to your employer’s 403(b) plan.
This year, you can contribute up to $14,000 on a pretax basis to a 403(b) plan. If you are age 50 or over, you can contribute an additional $4,000.Should your employer offer more than one retirement plan with a salary-deferral feature, or you participate in salary deferral plans of other some cases, however, a higher salary-deferral limit may apply under a 403(b) plan if you have been with the same employer for at least 15 years.
It may be advantageous to carefully coordinate your contributions to take maximum advantage of both employer plans and vehicles offering long-term tax benefits, such as the Roth IRA. This may mean allocating a portion of your retirement-planning budget to several vehicles, instead of using just one.
Consider other deferred-compensation plans. Some employers sponsor non-qualified deferred-compensation plans for select management or highly compensated employees. This type of plan permits highly compensated employees to defer an amount of compensation unrestricted by the limitations applicable to qualified salary-deferral plans, [e.g., 401(k) and 403(b) plans], and enjoys tax-deferred growth of plan assets until future distribution.
I’m self-employed. How can I benefit from tax-deferred retirement plans?• If you are self-employed, you may have a variety of retirement plans available to you. Each varies in features and benefits. Contributing to these plans reduces your current taxable income and allows the assets to grow tax-deferred. Upon withdrawal at retirement, the assets may be taxed at a rate lower than your current rate.
• Retirement plans can be established for self-employed individuals and their employees, as well as for employees of closely held corporations, Contributions to these plans are generally based on compensation. For qualified plans, the amount of compensation that may be used to determine deductible contributions to retirement plans is limited to $210,000.
Let’s take a look at common types of retirement plans:
Profit-Sharing Plans• Profit -sharing plans are defined contribution plans that provide the employer with the greatest funding flexibility. These types of plans are ideal for employers who are unsure of their financial circumstances and are unable to commit to a fixed annual contribution. The annual deductible contribution limit for a profit-sharing plan is 25% of eligible compensation (generally up to $42,000 for the current plan year).
Money Purchase Pension Plans• Money purchase pension plans are defined contribution plans that require the employer to contribute a fixed percentage of compensation each year. The annual deductible-contribution limit for a money purchase plan is the lesser of 25% of eligible compensation or $42,000.
Simplified Employee Pension (SEP) Plans• SEP plans are a hybrid of an IRA and a profit-sharing plan and are particularly well suited for a business that is new or has variable profits. Contributions to a SEP are limited to the lesser of 20% of compensation, or $42,000, for the 2005 plan year. (Contributions are not mandatory.)
Savings Incentive Match for Employees (SIMPLE) Plans• Employers with 100 or fewer employees can offer their employees the option of reducing their taxable compensation by up to $10,000 for the year 2005 by establishing a SIMPLE plan and having that amount contributed to their SIMPLE account. In general, employers must make dollar-for-dollar matching contributions of up to 3% of compensation (or a 2% non-elective contribution to tall eligible employees) to participants’ SIMPLE accounts.
Remember that in whatever plan you participate, the more you contribute, the more your current income taxes may be reduced. The tax deferral of these savings can also have a great impact on the assets available for you retirement.
How do I take advantage of the benefits of employer-sponsored retirement plans?• Defined-contribution plans, such as 401(k) plans, are common forms of employer-sponsored retirement plans. If you work for an employer who offers such a plan, you may elect to contribute pre-tax income through payroll deductions. The employer often matches these deferred amounts to some extent. In many instances, you can even invest in shares of your employer’s stock. The income earned within the plan is tax-deferred until withdrawn.
Qualified nonprofit organizations, such as public school systems, hospitals and charitable organizations, can sponsor deferred-compensation plans elect to make salary deferral contributions. The employer may also choose to make contributions on your behalf and may match your salary deferral contributions. Contributions to 403(b) plans can be invested in mutual funds, closed-end investment companies or deferred annuity contracts. You can select the investments that best suit your needs, as long as the employer approves the 403(b) provider.
Tax-Planning Strategies to Consider
Generally, you should maximize pretax salary-deferral contributions to your employer’s 401(k) plan, up to $14,000 for 2005 depending on the percentage allowed in the plan. If you are age 50 or over, you can add anadditional $4,000. Doing so defers taxes on both the amounts contributed to the plan and any income earned thereon. If the plan allows, you can borrow from the 401(k) plan if a need arises. Also, withdrawals for certain hardships are permissible (of the plan allows) but taxable.
Maximize salary-deferral contributions to your employer’s 403(b) plan.
This year, you can contribute up to $14,000 on a pretax basis to a 403(b) plan. If you are age 50 or over, you can contribute an additional $4,000.Should your employer offer more than one retirement plan with a salary-deferral feature, or you participate in salary deferral plans of other some cases, however, a higher salary-deferral limit may apply under a 403(b) plan if you have been with the same employer for at least 15 years.
It may be advantageous to carefully coordinate your contributions to take maximum advantage of both employer plans and vehicles offering long-term tax benefits, such as the Roth IRA. This may mean allocating a portion of your retirement-planning budget to several vehicles, instead of using just one.
Consider other deferred-compensation plans. Some employers sponsor non-qualified deferred-compensation plans for select management or highly compensated employees. This type of plan permits highly compensated employees to defer an amount of compensation unrestricted by the limitations applicable to qualified salary-deferral plans, [e.g., 401(k) and 403(b) plans], and enjoys tax-deferred growth of plan assets until future distribution.
I’m self-employed. How can I benefit from tax-deferred retirement plans?• If you are self-employed, you may have a variety of retirement plans available to you. Each varies in features and benefits. Contributing to these plans reduces your current taxable income and allows the assets to grow tax-deferred. Upon withdrawal at retirement, the assets may be taxed at a rate lower than your current rate.
• Retirement plans can be established for self-employed individuals and their employees, as well as for employees of closely held corporations, Contributions to these plans are generally based on compensation. For qualified plans, the amount of compensation that may be used to determine deductible contributions to retirement plans is limited to $210,000.
Let’s take a look at common types of retirement plans:
Profit-Sharing Plans• Profit -sharing plans are defined contribution plans that provide the employer with the greatest funding flexibility. These types of plans are ideal for employers who are unsure of their financial circumstances and are unable to commit to a fixed annual contribution. The annual deductible contribution limit for a profit-sharing plan is 25% of eligible compensation (generally up to $42,000 for the current plan year).
Money Purchase Pension Plans• Money purchase pension plans are defined contribution plans that require the employer to contribute a fixed percentage of compensation each year. The annual deductible-contribution limit for a money purchase plan is the lesser of 25% of eligible compensation or $42,000.
Simplified Employee Pension (SEP) Plans• SEP plans are a hybrid of an IRA and a profit-sharing plan and are particularly well suited for a business that is new or has variable profits. Contributions to a SEP are limited to the lesser of 20% of compensation, or $42,000, for the 2005 plan year. (Contributions are not mandatory.)
Savings Incentive Match for Employees (SIMPLE) Plans• Employers with 100 or fewer employees can offer their employees the option of reducing their taxable compensation by up to $10,000 for the year 2005 by establishing a SIMPLE plan and having that amount contributed to their SIMPLE account. In general, employers must make dollar-for-dollar matching contributions of up to 3% of compensation (or a 2% non-elective contribution to tall eligible employees) to participants’ SIMPLE accounts.
Remember that in whatever plan you participate, the more you contribute, the more your current income taxes may be reduced. The tax deferral of these savings can also have a great impact on the assets available for you retirement.
There are other tax-cutting strategies in addition to those mentioned here. If you would like assistance in selecting tax-saving strategies that make the most sense in your situation, contact us today!