For some types of retirement plan contributions
By Nathan Gilbert
As the year turns over to 2017, it seems that many are happy to be saying goodbye to 2016. I am not completely sure the exact reason or reasons why, but the popular sentiment seems to be that 2016 was a “bad year.” I am certain many good things happened to many people, but negativity often moves the needle and gets people talking and commenting.
There may be at least one good reason why we shouldn’t let 2016 fade into the rearview mirror so quickly: retirement plan contributions. Until April 15 of this year (or your tax filing deadline), you are still allowed to make contributions to some types of IRAs and count them for 2016. This option can be especially helpful if you are a small business or a sole proprietor, and you do not have a 401(k) or other type of plan into which you have made recurring contributions over the past year. Not only will contributing to IRAs help you save for retirement, but it could also provide you with a tax deduction if you need one.
As usual, there are limits and restrictions that the IRS gives us. Whether or not you are already covered by a plan at work, your income level and your tax filing status (single, married, etc.) are considered when it comes to your options.
If you are under 50, you can contribute up to $5,500 to an IRA, and for those over 50, you are allowed an additional $1,000 catch-up contribution. These limits apply to both Traditional and ROTH IRAs in total. In other words, if you are under 50, you could contribute $2,500 to a Traditional IRA and $3,000 to a ROTH IRA. However, you could not contribute $5,500 to both.
Traditional and ROTH IRAs
The main difference between a Traditional IRA and a ROTH IRA is the tax treatment. In short, a Traditional IRA usually provides a tax deduction when a contribution is made, and then the money is taxed when withdrawn in retirement (after age 59.5). A ROTH IRA does not provide a tax deduction when a contribution is made, but the account grows tax-free, and the withdrawals are not taxed in retirement.
Simplified Employee Pensions
For a small business or sole proprietor, a SEP (Simplified Employee Pension) IRA might be a particularly good option. The contribution limits are much higher, and your ability to contribute is not limited by your spouse’s plan options. For 2016, you can contribute up to 25 percent of compensation or $53,000, whichever is less. Please note that if you do have employees, the company is required to contribute the same percentage compensation for each qualified plan participant. For example, if your compensation was $100,000 in 2016, you could contribute up to $25,000 to a SEP IRA (25 percent of $100k). If you have a full-time assistant that received $30,000 in compensation, then you/your company would also need to add $7,500 to his or her SEP IRA (25% of $30,000).
Another good option for a small to mid-size (under 100 employees) company might be a SIMPLE (Savings Incentive Match Plan) IRA. The IRS does love their acronyms! The SIMPLE IRA allows employees to defer/contribute up to $12,500 per year from their salaries. Again, there is an additional catch-up amount of $3,000 for those employees who are over 50 years of age. Typically, there is a requirement that the employer do some sort of matching (usually 3%), but the cost to the employer is still minimal when compared to other plan options. Note that the latest you can deposit employee contributions and count them for the previous tax year is January 30. For the employer match, the deadline is the tax filing deadline for the business.
As always, consulting a tax advisor on the best option for your situation is a great idea. Just keep in mind that just because 2016 is officially over, it might not be over for your retirement savings options. All the best to you and yours in 2017!