To Fend Off Uncle Sam, Pay Yourself First
Your Uncle Sam is a greedy old man. He's always taking money from you and is never satisfied with your contribution to the cause. What can you do to get even? Stop paying Uncle Sam and pay yourself instead!
Pay Yourself First with Retirement Plan Contributions
Stop giving Uncle Sam more than you need to by paying into your retirement plan. Lots of taxpayers use IRAs, which are nice retirement plan products, but the contribution limits are low at $5,500 for people under age 50 and $6,500 for people 50 years old and older.
The real opportunity is for business owners, who have a variety of retirement plans options to choose from. Many retirement plans allow for up to $54,000 of contributions, which is a lot more than you can contribute to an IRA. What you want to do is set up a retirement plan, harvest some of your profits, and keep them out of the reach of old Uncle Sam. You’re simply moving money from one hand (your business checking account) to your other hand (your retirement accounts). It's still your money, but you're getting a large tax deduction for doing so.
Retirement Contributions for Business Owners
As a business owner, your retirement plans can evolve and change as your business evolves and changes. Typically, this happens when you add employees. An employer-sponsored plan where the employer makes the bulk of contributions, such as a SEP, a Keogh, or a Profit Sharing plan, are great if you only employ family members.
However, once you start adding non-family member employees, your retirement planning options may need to change. Switching to popular plans like 401(k) and SIMPLE make more sense. In these plans, the employee makes most of the contributions, not you the employer.
If you’d like to start a 401(k) or SIMPLE retirement plan for 2017, you must do so by October 1 of this year. Don't miss out on this great opportunity to stuff some money aside, shelter it from Uncle Sam, and build your future.
Retirement Contribution Timelines
You have until March 15 of the year after to make employer contributions to retirement plans. If your company files an extension, you have until September 15 to do so. We often recommend filing a business tax extension to buy more time to make retirement contributions. Real Estate agents are a classic example of this as they are typically cash poor in the spring but have lots of cash in the summer.
You can make contributions after the year closes and still take it as a deduction for the previous year. For example, if you wanted to make an employer contribution to a retirement plan for 2017, you can make that contribution after December 31 and it will still be counted as a deduction for 2017.
But There's a Trap
The fact that you can contribute after the close of the year doesn't mean it will always work out for you. You must have the money you plan to contribute in your business account on December 31. If the money isn't there and you plan to use 2018 profits to fund the contribution, you may be caught short. If you're planning to contribute after the close of the year, make sure you have the money in your business account at year end.
Defined Benefit Plans for Successful Companies
Now, some businesses are very fortunate and make their owners a ton of money. A great opportunity for them is to set up a defined benefit plan. Think of it as an old-time pension plan like our parents used to have when they worked for an employer and upon retirement, received a pension that paid out as long as they were alive.
With a defined benefit plan, the company has an obligation to make payments for your lifetime. An actuary reviews your plan and determines how much money your company needs to fund to be able to meet that future obligation.
Because of the anticipated expenditure, the contributions for a defined benefit plan are HUGE. The limit is $215,000 per year. That's correct—your company could be putting $215,000 annually into a defined benefit plan, sheltering that money from taxation, keeping that money out of Uncle Sam’s hands, and building your future.
To recap, a great way to protect your money from Uncle Sam is simply put it away for your future. Don't allow the government to continue to take money from you. As you become more successful and your tax bracket increases, the most impactful way to shelter money is to simply put money into retirement plans. Contact Kaiser Tax to learn more about your retirement plan options.