Employing these four tips will set you on the path to a financially secure retirement, whether you are a new employee, a small business owner, or just want to save some money.
1 - If Your Employer Offers a Retirement Plan, Enroll as Soon as You Can
If you start a new job, enroll in your company’s retirement plan right away. If there is a waiting period before you can enroll, do so as soon as you are able. Why? Well, obviously, starting to save for retirement sooner rather than later will grow your money more over time. But did you know about these other two valuable benefits you can get by contributing to your employer-sponsored retirement plan?
You Reduce Your Taxable Income by the Amount of Pre-Tax Dollars You Contribute
That’s right. When you contribute with pre-tax dollars to a qualified retirement plan, you reduce your taxable income by the amount you contribute, putting you in a lower tax bracket than you would be in had you not contributed. By starting to save for retirement, you get to pay less in income tax and keep more of your hard-earned income!
You are able to contribute up to $19,500 annually in pre-tax dollars to 401(k) or 403(b) plans. Maxing out will save you a significant amount in income tax. If you are 50 years old or older in 2020, you can contribute an additional $6500 in “catch-up contributions.” Again, maxing out the normal contribution plus contributing $6500 will save you a significant amount in income tax and get you to your retirement goals sooner.
You May Be Eligible for a Tax Break in the Form of a “Savers Credit.”
Those contributing to a retirement plan, including those who are self-employed, may qualify for a retirement savings contribution credit. The maximum amount an eligible participant can receive is $2,000 ($4,000 if married filing jointly), with the percentage received depending on income.
In 2020, the maximum adjusted gross income for Savers Credit eligibility is:
- $65,000 for a married couple filing jointly;
- $48,750 for a head of household;
- $32,500 for all other taxpayers.
Savers Credit According to 2020 Adjusted Gross Income:
Credit Single Filer Head of Household Joint Filers
50% $19,500 or less $29,250 or less $39,000 or less
20% $19,501-$21,250 $29,250-$31,875 $39,001-$42,500
10% $21,251-$32,500 $31,876-$48,750 $42,501-$65,000
To claim the Savers Credit:
- You must be 18 years of age or older.
- You cannot be a full-time student.
- You cannot be claimed as a dependent on another person’s return.
- You must file Form 8880 (Credit for Qualified Retirement Savings Contributions)
For savings in tax years prior to 2020, see the Saver’s Credit IRS page.
2 - If You Own a Small Business, Establish a Retirement Plan
Tax Credit for Small Businesses
Since 2016, small businesses with qualifying research expenses have the option of applying up to $250,000 of those expenses against their payroll tax burden by:
- Filing Form 6765, Credit For Increasing Research Activities with its business income tax return.
- Filing Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities with its payroll tax return.
Tax Credit for Retirement Plan Start-Up Costs
Did you know that you can claim a tax credit for the ordinary the costs of starting a 401(k), 403(b) or other qualified retirement plans? Right now, this credit is 50% of the cost to set up the plan, administer it, and educate employees about the plan, up to $500 per year for each of the first 3 years of the plan.
Businesses qualify for this credit if they:
- Have 100 or fewer employees who received at least $5,000 in compensation
- Have at least one participant who is a non-highly compensated employee.
- Have employees who were not substantially the same employees who participated in a previous retirement plan administered by you or your business or a predecessor of you or your business.
- Complete and file Form 8881, claiming the available credit for Small Employer Pension Plan Startup Costs.
Employer Contributions to a Retirement Plan Reduce Taxable Revenue
Many employers match their employees’ contributions to the company’s retirement plan, not only for the good of their employees, but because those matching contributions reduce the company’s taxable revenue.
Keep in mind that employer contributions are capped at 25% of compensation (or 20% of net earnings from self-employment for contributions to your account as an owner-employee).
Company Owners Can Reduce Their Own Taxable Income
For 2020 small business owners having an Individual or Small Business 401(k) can contribute a maximum of $57,000 and deduct it from taxable income.
If the company owner has a Roth 401(k), in 2020 he or she can make post-tax contributions up to $19,500. While this does not reduce taxable income now, when you withdraw from your Roth 401(k) that withdrawal will be tax-free!
3 - Seek Professional Advice about Your Retirement Preparation and Readiness
There are several reasons to visit a professional to determine what retirement plan or plans are appropriate for you or your business, and your goals. The most important of which is that the tax rules change every year, and new retirement vehicles are created. Retirement industry professionals will keep abreast of changes and developments and will be able to advise you as to your available options.
Contact an LRS Representative if you need professional advice from a retirement planning expert.
4 - Pick a Retirement Plan That’s Right for You
There are many different types of retirement plans to choose from:
- Traditional Individual Retirement Arrangements (IRAs)
- Roth IRAs
- 401(k) plans
- 403(b) plans
- SIMPLE (Savings Incentive Match Plans for Employees) IRAs
- SEP (Simplified Employee Pension) Plans
- Payroll Deduction IRAs
- Profit-Sharing Plans (PSPs)
- Defined Benefit Plans
- Employee Stock Ownership Plans (ESOPs)
- 457 Plans
By all means, do your research, but don’t try to figure out which option is best for you on your own. There is too much money at stake, not to mention your employees’ futures, and perhaps your own! Your retirement professional can explain each available option and help you determine what is best for you, your business, and your employees. If you’re ready to explore your options contact us today, or fill out a request for proposal and we will contact you!
