With just under a month left in the year, if you have not already made your Roth or Traditional IRA contribution for 2011, you should plan to do so. The longer the money has to grow, the better you should be. Assuming that you qualify to make deductible contributions, traditional IRAs and employer-sponsored retirement plans, such as, 401(k) plans allow you to contribute funds pretax, reducing your 2011 taxable income.
If you are under the income limits for a Roth IRA, contributions that you make to a Roth IRA or a Roth 401(k) plan are made with after-tax dollars, but qualified Roth distributions are completely free from federal income tax, making these retirement savings vehicles very appealing.
For 2011, you can contribute up to $16,500 to a 401(k) plan, or $22,000 if you’re age 50 or older. You can contribute up to $5,000 to a traditional or Roth IRA, $6,000 if you’re age 50 or older. The window to make 2011 contributions to an employer plan closes at the end of the year; however, you have until the due date of your federal income tax return (not extended) to make 2011 IRA contributions.
To qualify to make a Roth or a Traditional IRA contribution, you must have earned income. The following lists the income limits and contribution limits for a Roth and a Traditional IRA:
Married Filing Jointly
- If your combined adjusted gross income (AGI) is more than $179,000, you cannot contribute to a Roth. Your contributions should be made to a Traditional IRA.
- If your AGI is between $169,000 and $179,000, the amount you may contribute to a Roth phases out the closer your income is to $179,000. If your income is in this range, discuss with your tax adviser the amount you may contribute to a Roth IRA. The remainder could be contributed to a Traditional IRA.
- If your AGI is below $169,000, you are allowed to make the full contribution to a Roth.
Single
- If your AGI is more than $122,000, you cannot contribute to a Roth.
- You should consider contributing to a Traditional IRA.
- If your AGI is between $107,000 and $122,000, the amount you may contribute to a Roth phases out the closer your income is to $122,000. You should consult with your tax adviser for the amount you are allowed to contribute to a Roth. The remainder could be contributed to a Traditional IRA.
- If your AGI is below $107,000, you can make a full contribution to a Roth.
Even if you are a small business owner, there are several options to facilitate deferring income and saving for retirement.
SEP-IRA
A Simplified Employee Pension (SEP-IRA) is an easy account to set up and maintain. It is a plan that can be used by any employer. The plan allows a business owner to make contributions to his own and his employees’ retirement, without getting involved in a more complex qualified plan.
- The plan can be set up as late as the due date of the business’s return, including extensions.
- For calendar-year businesses, this is October 15 of the next year for extended returns.
- Under a SEP, an employer makes contributions to a traditional individual retirement arrangement account set up by or for each eligible employee.
- An employer may require employees to meet certain requirements to be eligible for the plan.
- Maximum 2011 contributions cannot exceed the lesser of 25% of the employee’s compensation, or $49,000.
- The annual compensation limit allowed to calculate contributions is $245,000.
SIMPLE-IRA
This is a plan that requires little administrative paperwork. Employers with 100 or fewer employees that do not have any other retirement plan are eligible to use this type of plan. The plan must be established by October 1 of the current year. An exception is allowed for new employers—the plan must be established by December 31st of the calendar year. No annual tax filing is required for this type of plan.
- Under this plan, a SIMPLE IRA must be set up for each eligible employee.
- An eligible employee is any employee who received at least $5,000 in compensation during any two years preceding the current calendar year, and is expected to earn $5,000 this year.
- The employer must contribute to each employee’s account.
- Either the employer matches the employee contributions dollar for dollar up to 3% of compensation, or the employer contributes 2% of each eligible employee’s compensation, even if the employee does not contribute to the plan.
- The maximum annual contribution is $11,500 in 2011, per employee ($14,000 for employees age 50 or older).
Defined Contribution Plans
Defined contribution plans include Profit Sharing, 401(k) plans (a type of profit sharing plan) and Money Purchase Plans. Any business may establish one or a combination of these plans. There is no generic form to establish the plans. The expertise of a financial institution or employee benefit adviser, generally, is required. The plan must be written and adopted by the last day of that year (December 31st for calendar-year employers).
Profit Sharing Plans
This is one of the most flexible of all retirement plans. Contributions are discretionary, meaning a company can raise, lower or eliminate contributions as profits dictate from year to year.
401(k) Retirement Plan
A type of profit sharing plan, the 401(k) is one of the least restrictive retirement savings programs available today. It permits employees to deduct a portion of their earnings before taxes. The money is allowed to grow and compound tax-deferred until withdrawn, typically, at retirement.
Money Purchase Plan
A Money Purchase Plan allows a company to make annual contributions that are not tied to profits. In many ways it operates like a profit sharing plan, except the company is required to contribute the same percentage of employees’ salaries each year.
At Henssler Financial we believe you should Live Ready, which includes being able to improve your income tax situation today, while saving for your retirement tomorrow. If you have questions regarding your 2011 retirement plan contributions the experts at Henssler Financial will be glad to help. You may call our experts at 770-429-9166, or e-mail at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
