Written by Douglas Velnoskey
Business owners/entrepreneurs have essentially 5 tax advantaged retirement plans to save for retirement. Our recommendation is for an ongoing review of the current plan as their businesses evolve and earned income increases.
The choice of a retirement plan should be based on how much a business owner/entrepreneur is financially able to fund. IRS contribution limits referred to are for 2023.
Individual Retirement Accounts (IRA) are a great way for a business owner to start when their business is young. Individuals with earned income in most cases are allowed to make a $6,500 tax deductible contribution to an IRA, $7,500 if the contribution is made by someone 50 years of age or older, subject to tax filing status and income phase outs. Keep in mind, income limits apply to traditional IRAs only if you or your spouse has a retirement plan at work. If neither you nor your spouse has a retirement plan at work, your contributions (up to the annual maximum) are fully deductible in the year they are made.
Things to remember about IRA’s:
- Investments within the account grow tax-deferred.
- Withdrawals in retirement are taxed as ordinary income.
- The IRS requires individuals to begin taking money out of the account at age 73.
- Unqualified withdrawals before age 59½ may trigger a 10% early withdrawal penalty and income taxes.
Roth IRA’s have the same contribution limits as IRA’s, but different income eligibility limits for contributions. They differ from IRA’s in that the contributions are not tax deductible, distributions after age 59 ½ are not subject to income tax, and there are no requirements to take withdrawals at any age. Roth IRA’s are particularly attractive to young individuals who are not in a high income tax bracket where a deductible contribution to an IRA doesn’t provide a significant deduction and individuals who expect their income to be high in retirement.
SEP (Simplified Employee Pension) IRA’s are suitable for individuals in a position to save more money for retirement than the contribution limits of an IRA or Roth. Employers may contribute up to 25% of compensation up to a limit of $66,000. SEP IRA’s include employees with certain exclusions.
SIMPLE IRA’s (Savings Incentive Match Plan for Employees) allow owners and employees to defer salary pretax with a match from the employer. Individuals under age 50 may defer up to $15,500, those 50
and older may defer up to $19,000.
401(k)’s for individuals and businesses permit salary deferrals of up to $22,500 for employees under 50 and $30,000 for those 50 and over. Plan sponsors may make matching and/or profit-sharing contributions.
Every business is different. Please seek out professional advice for your individual circumstances.
For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest. Douglas P. Velnoskey, CFP, Executive Vice President/Wealth Management, Financial Advisor, Westminster, MD. Janney Montgomery Scott LLC. Member: NYSE, FINRA, SIPC.
