Deducting Retirement Contributions
One of the best ways to reduce your tax bill, while increasing your net worth
and future security is to invest in a retirement plan. When you own the show,
you're in a position to tailor-make a plan that suits your needs precisely. If
you set up a plan that meets the IRS requirements, you can make tax-deductible
contributions to the plan, which will build up tax-free until you withdraw them.
As a self-employed business owner, your major retirement plan options are:
plans - defined benefit, defined contribution, or hybrid retirement
plans set up by a self-employed person or partnership. Common types of
Keoghs include money-purchase plans and profit-sharing plans.
Employee Pensions (SEPs) - a very flexible, easy plan to set up that
involves making contributions to special Individual Retirement Accounts
(IRAs) set up for the business owner and each eligible employee.
plans - a relatively new type of simplified retirement plan, the Savings
Incentive Match Plan for Employees (SIMPLE plan, which allows employees to
make elective contributions of up to $6,500 per year in 2001 ($7,000 in
2002) and requires employers to make matching contributions.
Retirement Accounts (IRAs) - the easiest solution to retirement savings,
although your contributions are limited to $2,000 per year in 2001 ($3,000
Beginning in 2002, small employers with no more than 100
employees will receive a tax credit for some of the costs of
establishing new retirement plans. The credit equals 50 percent
of the start-up costs incurred to create or maintain a new
employee retirement plan. The credit is limited to $500 in any
tax year and it may be claimed for qualified costs incurred in
each of the three years beginning with the tax year in which the
plan becomes effective.
To further encourage low- and middle-income taxpayers to save
for retirement, a temporary nonrefundable tax credit has been
created for contributions made by eligible taxpayers to a
qualified plan for tax years 2002 through 2006. The maximum
credit available is $1,000 for a $2,000 contribution.
Also beginning in 2002, taxpayers can look forward to greater
retirement plan contribution limits and higher tax deductions
for employer contributions to certain retirement plans. So if
you are thinking about setting up a retirement plan for your
business, 2002 would be a good year to start.
Reporting retirement plan contributions. If you are a sole proprietor,
contributions made for employees to a Keogh plan, an SEP, or a SIMPLE plan are
reported on Line 19 of Schedule C, "Pension and profit-sharing plans."
Contributions made to the plan on your own behalf would be reported on Line
29 of your Form 1040, "Keogh and self-employed SEP and SIMPLE plans."
There are also some special tax reporting requirements with regard to the
Keogh or other retirement plan itself. Generally, an annual report on IRS Form
5500-C/R (for plans with fewer than 100 participants) must be filed with the IRS
by the last day of the 7th month after the close of the plan year.
Single-participant plans can use Form 5500-EZ. See the instructions for these
forms (available from the IRS by calling 1-800-TAX-FORM, or at its website
or see your professional tax advisor.
IRA contributions. If your IRA contribution is deductible, you don't
need to file any special forms to claim it, nor do you need to itemize your
deductions on Schedule A of Form 1040. Simply write the amount of your
contribution (and your spouse's contribution, if married filing jointly) on Line
23 of Form 1040, or Line 16 of Form 1040A.
To report any nondeductible IRA contributions, you must file IRS Form 8606, Nondeductible
IRAs, with your tax return.
Among the Business Tools are Form
A and Schedule
C. They are in Adobe Acrobat .pdf format, and you will need
Acrobat Reader 4.0 to view the files and print them. Acrobat 4.0
is available at no cost in the Business Tools area as well.