It’s not too late to take advantage of the tax-deferred treatment of assets in retirement accounts for 2016. In addition to the tax deduction, the ability to grow assets without having to pay taxes on dividends, interest, and/or capital gains allows for greater growth of principal over the course of an investor’s lifetime. Many employers also offer some type of matching program (think free money). Investors should contribute as much as possible into tax deferred accounts, but if you are not able to meet the maximums allowed by law, contribute at least enough to capture any employer match. For self-employed individuals, a Simplified Employee Pension (SEP) Plan, may provide the ability to stash away even more income on a tax-deferred basis. Some of the available plans even allow you to make contributions in 2017 and apply them to the 2016 tax year.
Here are some of the most common retirement plans:
401(k) or 403 (b) plans: Employees must make their contributions in the tax year to which the deduction applies. Generally, employees under age 50 can contribute up $18,000 into 401(k) or 403(b) plans. If age 50 or older, this dollar amount can be increased by $6,000.
Individual Retirement Accounts (IRAs): For IRAs, the contribution is limited to $5,500. This limit also applies to spousal IRAs. If 50 or older, an additional $1,000 deduction is available. Contributions can be made after the tax year closes but must be made by the time you file your federal return and not later than April 15th (in this case 2017). Keep in mind, if you participate in an employer retirement plan, you may not be able to deduct contributions to a traditional IRA due to income limitations. If that is the case or if the tax savings on a deductible contribution is low, you might want to consider contributing to a ROTH IRA. The contribution limits are the same ($5,500 and $6,500). There is no deduction for the initial contribution, but the earnings in a ROTH grow tax-free, and there are no taxable required minimum distributions. ROTH IRAs also may not be available to you if your income exceeds the IRS limitations, so be sure to check your eligibility.
Contributions to a Simplified Employee Pension (SEP) Plan are based upon ones self-employment income, but cannot exceed $53,000. Contributions can be made after the tax year closes but not later than the extended due date of the tax return. However, if this is a new SEP account, the account must be opened by December 31st of the year that the contribution applies to. So, if you are opening a SEP account for the 2016 tax year, even though it can be funded in 2017, the account must be open by the end of this year.
In addition to these most common retirement plans, there are other types of pension plans available to business owners. Talk to your financial or tax advisor to make sure you fully understand your options and the tax benefits that they provide.