Self Employment - Pension Plan
There many tax benefits for the self-employed person. One of the benefits that are overlooked most of time is the tax deduction for a self-employment pension plan. The self-employed person can start saving for his retirement and be able to save more in a year than the average salary worker.
The self-employment pension plan and the Keogh are excellent retirement strategies, since self-employed people can save and deduct taxes while they do so. An added benefit is deferred growth in taxes, meaning that a person doesn't have to pay tax on the income until he withdraws from his account. The IRS now also allows for an additional tax holiday. Follow these guidelines to make the most of the self-employment pension plan.
Simplified employee pensionThis type of pension plan allows the individual to make a contribution and deduction of as much as between 13 and 14 % of his income. If a person is employed by his business, he can contribute and deduct as much as 15% of his wages. This also has the advantage that a person who is going through some cash flow problems doesn't have to contribute for a period.
The simplified employee pension is easy to manage and even to setup. It is usually opened for free at a financial institution such as a bank or an insurance broker. The government doesn't require annual tax reports and the running costs are zero.
The Keogh plan is similar to the company retirement plan offered to the employees and is also a type of self-employment pension plan. There are two types of Keogh, namely sharing in profit and the second being the specific benefit plan. You can get a tax deduction in your present tax year if the plan was started before the end of the tax year. After the establishment had been done, the contribution made can be postponed until the next year's tax return date. The yearly contribution to the Keogh plan is calculated according to the percentage of income, which may be a maximum of 20%, subject to no more than a 000 limit. A draft must be submitted in the first year and yearly reports must be supplied to the IRS. The setup of the plan can become expensive.
The Keogh retirement plan is aimed at delivering a yearly specified pension income. The maximum retirement benefit for a year is around 000. The total is based on the calculations by the actuary. The follow factors play a role in the amount of the contribution:
- Specific benefits
- Time left until retirement
- Estimated return on savings.
The tax reports and the actuary charges can eat at the investment. The self-employed person lacks freedom in deciding how much to contribute with this type of retirement plan. The plan is ideal for people who are already in their fifties or older since they can make bigger payments over a shorter period.
The RothThe Roth allows a huge build up of non-taxable income although you cannot deduct tax for contributions made. Payments into the account up to a limit of per person can be made, subject to the phase out adjusted gross earnings of between 000 and a maximum of 000 for unmarried people and between 000 and 000 for married couples.
IRA deductionsIf your partner is not enclosed in the benefits of a self-employment pension plan, he or she can do a IRA deductible contribution of a maximum of if the combined income from the two income earners is below 000.
Covering your employeesThe workers at your enterprise must also be covered by the self-employment pension plan. This may cause several problems in terms of tax returns. Consult a financial planner or tax advisor on this issue before you select a retirement plan.