2023, $69,000 in 2024, or up to 25% of compensation or net self-employment earnings, with a $330,000 limit on compensation ($345,000 in 2024) that can be used to factor the contribution.
Tax advantage: You can deduct the lesser of your contributions or 25% of net self-employment earnings or compensation — limited to that $330,000 cap per employee in 2023 ($345,000 in 2024) — on your tax return. Distributions in retirement are taxed as income. Previously, there was no Roth version of a SEP IRA. Under legislation signed by President Biden in December 2022, Roth contributions are now allowed.
Employee element: Employers must contribute an equal percentage of salary for each eligible employee, and you are counted as an employee. That means if you contribute 10% of your compensation for yourself, you must contribute 10% of each eligible employee’s compensation.
4. SIMPLE IRA
Best for: Larger businesses, with up to 100 employees.
Contribution limit: Up to $15,500 in 2023, plus catch-up contribution of $3,500 in 2023 if you're 50 or older (up to $16,000, plus a catch-up contribution of $3,500 in 2024). If you also contribute to an employer plan, the total of all contributions can’t exceed $22,500 in 2023 or $23,000 in 2024. Contributions must also be made by tax day or the extension deadline if applicable.
Tax advantage: Contributions to a traditional SIMPLE IRA are deductible, but distributions in retirement are taxed. Contributions made to employee accounts are deductible as a business expense. The legislation signed into law in December 2022 allows for Roth contributions, effective in 2023.
Employee element: Unlike the SEP IRA, the contribution burden isn’t solely on you: Employees can contribute through salary deferral. But employers are generally required to make either matching contributions to employee accounts of up to 3% of employee compensation, or fixed contributions of 2% to every eligible employee. Choosing the latter means the employee does not have to contribute to earn your contribution. The compensation limit for factoring contributions is $330,000 in 2023, $345,000 in 2024.
5. Defined benefit plan
Best for: A self-employed person with no employees who has a high income and wants to save a lot for retirement on an ongoing basis.
Contribution limit: Calculated based on the benefit you’ll receive at retirement, your age and expected investment returns.
Tax advantage: Contributions are generally tax deductible, and distributions in retirement are taxed as income. An actuary must figure your deduction limit, which adds an administrative layer.
Employee benefit: If you have employees, you generally offer this plan to them and make contributions on their behalf.
Bonus Tool: IUL/Indexed Universal Life:
This is something that people have been adding to their portfolios over the past 15 years. Using the Tax-Free benefits of Cash Value Life Insurance. Here are the Key Elements: After-tax contributions/premium payments you can use a life insurance policy to fund part of your retirement. If your monthly premium were $500, roughly 60% percent of the premium would cover the cost of insurance and 40% would go towards tax-free future income later in life.
I hope these give you something to consider as you put ypur plan in place.
1st Capital Wealth Management Group can help. Find us at [email protected] www.1stcig,com 312-836-3800/Office 312-952-8040/Cell.