Retirement Contributions
Lesson 6 from: The Small Business Simple Guide to FinancesAmy Northard
Retirement Contributions
Lesson 6 from: The Small Business Simple Guide to FinancesAmy Northard
Lesson Info
6. Retirement Contributions
Lessons
Know Your Worth
1The Foundation of Your Business
09:38 2Creating a Usable Bookkeeping System
05:52 3Taxes
06:45 4Get Paid
05:48 5Small Business Deductions
06:30 6Retirement Contributions
06:12 7Income Statements
05:26Balance Sheet
05:39The Foundation of Your Business
Lesson Info
Retirement Contributions
1 (bright music) 2 Welcome to lesson six. 3 Today's lesson is all about planning 4 for your future retirement. 5 Our three goals for this lesson are 6 understand the differences between 7 the retirement plan options available 8 for the self-employed, 9 decide which type of retirement plan is right for you, 10 and determine how much you should contribute each month. 11 Let's get started 12 by looking at the options available to you. 13 There are four types of retirement plans to consider 14 as well as a 401k option. 15 I'll tell you a little bit about each type first, 16 and then you can start thinking about which 17 best fits your needs. 18 First of all, if you weren't sure, IRA stands 19 for individual retirement account, so pretty much anyone 20 with earned income, not just small business owners 21 can open and contribute to these accounts. 22 Both traditional 23 and Roth IRAs have several things in common, 24 but there are three main differences. 25 The first difference is when yo...
u pay taxes 26 on your contributions. 27 With the traditional IRA, 28 you pay your taxes when you withdraw funds. 29 With a Roth IRA, you pay your taxes 30 before contributing your funds to the account. 31 The other big difference between the two 32 is that with a traditional IRA, you're required 33 to take a minimum distribution from your account 34 starting at the age of 72. 35 This means that you will take a mandatory, 36 taxable withdrawal every year. 37 There aren't required minimum distributions with a Roth IRA, 38 but every other account type we'll discuss today 39 does have minimum distributions. 40 The third big difference is that with a Roth IRA, 41 you can make tax free 42 and penalty free withdrawals 43 on your contributions whenever you'd like. 44 This does not apply to your earnings, however. 45 With other IRA types as well as 401Ks, 46 you'll likely pay an extra 10% in taxes 47 if you withdraw your money 48 from your account before the age 59 and a half. 49 Next step, let's look at the SEP IRA. 50 What's different about a SEP IRA is that it's set up 51 by the employer rather than the employee. 52 Any size business can establish a SEP IRA, 53 even if you're the only employee. 54 With a SEP, you can contribute up to 25% 55 of each employee's pay to the account 56 up to a maximum amount set by the IRS. 57 Doing this for yourself helps you limit the amount you pay 58 for self-employment taxes. 59 For example, if you pay yourself a salary of $75,000 60 and you contribute 25% of that salary to your SEP, 61 then you're only paying self-employment tax on $56,250. 62 In addition, the contributions you make 63 to the SEP are deductible on your business tax return, 64 so you'll be reducing the company's federal tax bill too. 65 One important item to note is that with a SEP IRA, 66 the employer must contribute the same percentage 67 of compensation for all eligible employees. 68 The last IRA for you to consider is the simple IRA. 69 This one is for businesses 70 that have less than 100 employees, 71 with a simple IRA employees make pre-tax contributions 72 up to a maximum amount set by the IRS. 73 Then the employer can either choose 74 to match the contribution for up to 3% 75 of the employees wages 76 or set a 2% non-elective contribution 77 for each eligible employee. 78 As a business owner, 79 this means you can make a pre-tax contribution 80 as an employee 81 and also earn the tax deduction for the contribution 82 as the employer. 83 An important item to note with a simple IRA 84 is that there are heftier early withdrawal penalties 85 than other types of plans. 86 We have one more option to discuss, the solo 401k. 87 This type of plan is just like a traditional 401k, 88 which means that as a small business owner, 89 you can make an employee 90 and employer contribution up to a maximum set by the IRS. 91 The main advantage to having a solo 401k is 92 that you'll also have the flexibility 93 to make post-tax Roth IRA contributions. 94 Another advantage is 95 that the contribution limits are higher than those 96 for the SEP or the simple IRA plans. 97 So which of these plans is best for you 98 and your small business? 99 You'll definitely wanna look at how much you're wanting 100 to contribute and pick the plan that will allow you 101 to contribute as much as you can. 102 This contribution chart is also in our lesson six guide 103 and can help you wrap your mind around the limits. 104 The tax filing deadline 105 for each plan might also be something for you 106 to take into consideration, 107 especially if you're at the beginning of a new year 108 and you want to get something set up 109 and running to count for last year's taxes, 110 or if most of your profits come in 111 at a certain time of the year. 112 Additionally, think about the size of your business 113 and your current and future tax brackets 114 when making this decision. 115 We also need to discuss how 116 to decide on an amount to contribute to your retirement. 117 Most financial advisors will encourage you to contribute 10 118 to 15% of your pre-tax income to your account. 119 However, if you're just starting your business, 120 this might not be possible for you, and that's totally okay. 121 Just look at your profits each month 122 and contribute as much of those as you think you can. 123 You can start with a lower amount or percentage each month 124 or each pay period, 125 and then increase your contributions 126 as you build your business. 127 What you can't do, however, is ignore your retirment 128 and sell yourself short by not preparing for your feature. 129 Make sure you use our lesson six checklist 130 to get yourself on the right track 131 with your retirement planning. 132 In our next lesson, we'll talk about how to read 133 and use an income statement.
Class Materials
Bonus Materials
Ratings and Reviews
Student Work
Related Classes
Business Basics