One of my favorite ways to reduce taxes, is investing in your future.
When you buy equipment, the average savings for taxes is $3 for every $10 you spend; leaving $7 for taxes. So, only buying equipment if you absolutely need it is the way to go.
When you set up a SEP or Simple IRA or 401k program you save $10 for every $10 on taxes. But, picking the best retirement plan is something you should talk with your financial advisor and your CPA about first, because you are not just planning for this tax season but for the next 10 to 15 years of tax seasons. Having a 5 year goal ready for this meeting will help with picking the plan best for you.
There are a few things to know about retirement plans as they relate to your taxes.
- You have until your tax filing day or April 15th to contribute to your retirement plan for the tax filing year.
- You need to keep track of what year you are contributing for and how much the maximum amount is for that year.
- Programs like a Simple IRA depends on the profits of the company, so the amount changes every year. If you have employees, the Simple IRA would have the company paying a percentage in for the employees to meet the program qualifications that you have set up in the beginning of the plan creation.
Here are a few investment scenario…
EXAMPLE 1: Mia has a staff of four, does a million in sales every year, and wants to help her staff save for retirement. In this program Mia put $13,000 of her own money in retirement and has the company put in 3% of what Mia and her employees investment and what is tax deductible.
EXAMPLE 2: Jake’s sales are 4 million a year with no employees and is over 50. Jake can invest $19,000 plus an additional $6,000. He can also have the company put in 25% of his salary tax deductible allocations. Also, by running payroll for himself, Jack gets to deduct the employer (company) part of FICA on the taxes also.
EXAMPLE 3: Where Mark wanted a simpler retirement plan, he went with a SEP IRA. This plan runs a lot like a 401k but is easier to run because Mark does not run payroll for himself. He can have the company invest up to 25% of the net earnings of the business. All three of these plans have employee and employer sides so you can max out both sides.
EXAMPLE 4: When talking to Fred, who is getting close to retirement age, the one thing he and his friends can agree on is they didn’t save enough for retirement or they wish they started in their 20’s. Because of this, people over 50 have a different amount for the retirement limits then people under 50. This amount is also different depending on the retirement plan you pick. It can be between $1,000 and $5,000.
The retirement vary with numerous options which is why it’s best to know what your future goals are for your business and personal life, and that this information is part of any conversation you have with your financial team.
Best way to save for retirement?
The best way to save for retirement is to have a pre-tax plan for the business to lower taxes now, and then set up a Roth IRA (taxes paid now). So as long as you have an income, you should be putting money into a ROTH IRA. Remember! You do not need to max out the limit every year. Putting $50 a month into your ROTH is a good start, and you can always change the amount whenever you want. Add up how much you spend on things you don’t need. I’m betting it’s more than $50 a month (Coffee Shop Amount?). You can roll that over into tax-savings strategy.
So! Above, we talked about company retirement plans to save on taxes, now let’s talk about Roth IRA and why it’s a good idea for you personally.
If you are under 50, you can put in up to $6,000 after taxes. This should come from your personal checking account and not ant of your business accounts. If you are over 50 you can put in up to $7,000 and this money will grow tax free! Let me say that again. You are done paying taxes on any money you pull out of this plan. So, if you put in $6,000 and it grows to $60,000 you do not pay taxes on any of that money.
A Roth IRA is a great way to start a retirement plan. If you are in your teens or 20’s and not sure where life is going, you should consider starting with a Roth IRA. And, once the money is in a retirement account, you should leave it in that account for retirement because the biggest money-making is in the years that the money is invested. However, if you have an emergency, you can pull money out. So, if you put $5,000 a year in for 10 years and something happens, you can pull out that $50,000 you put in without paying penalties or taxes… but you cannot touch the earnings (profits) you have earned.
How do you get started?
If you don’t have a financial advisor, I can help you find one. First, you want a fiduciary financial advisor. A fiduciary is a person who holds a legal or ethical relationship of trust; meaning they help you make decisions with your best increase in mind and not their best interests. You also want one who has lots of options and not just a select number of preset company packages.