RETIREMENT INCOME – INDIVIDUALS
One of the basic tenets of tax planning is to have a retirement plan be part of your overall tax plan. The reason for this is because retirement planning involves tax deferral. The whole concept of tax deferral means you delay paying income taxes until a later date and hopefully at lower tax rates. There two basic sets of retirement plans. You can have either personal retirement plan in which you fund the plan with your own personal assets or you can have a business retirement plan in which you can fund the plan with business assets. Two of the most common personal retirement plans are the Traditional IRA and the Roth IRA. With a Traditional IRA you can make contributions up to $5,000 for the tax year 2012 with an additional contribution of $1,000 if you are over the age of 50. The contributions are tax deductible but there are some exceptions to this rule depending if you contribute to another employer sponsored plan and your level of income. The other personal retirement plan is the Roth IRA. This type of plan has the same contribution levels as the Traditional IRA but the big difference is that the contributions are not tax deductible and all earnings inside the plan grow tax free instead of being tax deferred. With a Roth IRA the contributions are after tax contributions so there is no tax deduction and all earnings will grow tax free. When you are eligible to make distributions from the plan you will not pay any income tax.
Traditional IRA:
Pros – Tax deduction, no income limitation on contribution unless covered by an employer sponsored plan
Cons – Required to make minimum distributions at 70 ½ years old, cannot take out loan against plan
Roth IRA:
Pros – Earnings grow tax free, no required minimum distributions
Cons – There is an income limit in which you can make contributions (You can make contributions up to $170,000 in adjusted gross income for 2012), cannot take out loan against plan
Retirement Planning – Businesses
There are many types of business plans to choose from. The three more popular types of plans to choose from include the 401(k) plan, SEP IRA, and Simple IRA
401(k) Plan:
Pros – Contributions up to $17,000 for tax year 2012 as well as possible employer matching contributions, may take loans against value of plan
Cons – Plan may be costly to administer, contribution amounts may be lower than other types of plans, strict non discrimination rules
SEP IRA:
Pros – Contributions up to $50,000 or 25% of employee’s salary whichever is lower, both sole proprietors and corporations can set up this type of plan, easy to set up
Cons – Must abide by strict non discrimination rules, cannot take loans against Plan
Simple IRA:
Pros – Contributions up to $11,500 for 2012 as well as possible employer matching contributions, both sole proprietors and corporations can set up this type of plan, easy to set up
Cons – Must abide by strict non discrimination rules, cannot take loans against plan, contribution levels may be lower than other plans
Please contact Tom at (916) 781-2063 if you have any questions or concerns regarding your tax situation.