February 16, 2005 - While the powers that be in Washington debate how
the country should deal with the Social Security system and private accounts,
small business owners have to make their own decisions about funding retirement.
From a tax viewpoint, this is all about deferring tax from the present to the
future, and meanwhile compounding your earnings pre-tax.
(Continued below ...)
Tax law permits many kinds of retirement plans, each with its own
complications. Negotiating the maze is aided by
J. K. LASSER’S YOUR INCOME TAX 2005, which looks at multiple variations.
The classic small business retirement plan since 1962 has been the Keogh plan
(named for its Congressional sponsor, Rep. Eugene Keogh of New York City) for
the self-employed and partnerships. Keogh plans can be used by self-employed
individuals or partnerships with any number of employees to make greater
contributions than individual IRA’s permit.
Legal Tip:
For tax purposes, “partnership” includes general and limited partnerships,
as well as a multi-owner limited liability company (LLC) or limited
liability partnership (LLP). LLC’s and LLP’s can also be single-owner
enterprises; these are not tax “partnerships” and are taxed on the owner’s
individual return. No matter how owned, LLC’s and LLP’s achieve broad
limitations on liability under state law without incorporating, and all can
use Keogh plans.
Keogh plans come in two basic types:
--
like traditional pensions, they pay a benefit based on age and years of
service and are funded by contributions actuarially computed to arrive
at that benefit. The actuarial computations and reporting requirements
make these relatively complicated and expensive for small enterprises.
- Defined contribution plans
– like 401(k) plans they fund accounts which pay out whatever their
investment generates. They may be money purchase plans with fixed rates
of contribution or profit sharing plans contributing a percentage of the
business’s profit. Keogh profit sharing plans can also provide for
employee contributions.
A separate return is filed for most Keogh plans with special rules for
“one-participant” plans and those with less than $100,000 in plan assets. Each
type of plan and its variations are subject to limits on contributions for
owners and highly compensated employees and different limits for other
employees, all fully described in
J. K. LASSER’S YOUR INCOME TAX 2005.
For small business owners who find Keogh plans unwieldy, Congress has enacted
alternatives in recent years. Your simplest solution may be a SEP-IRA or the
appropriately named SIMPLE IRA. These plans create an individual retirement
account that holds the assets for each participant. Permitted contributions are
greater than for normal IRA’s but less than Keogh plans. The rules and
procedures are simpler than for Keogh plans but still deserve your careful
attention to the details described in
J. K. LASSER’S YOUR INCOME TAX 2005.
Timing Tip:
The deadline has passed to form an ’04 Keogh plan. Plans must be formed
before year-end to make contributions for that year, but if you have already
set up one, the actual contributions can be funded as late as the date of
filing the tax return, including any extensions. SEP-IRA and SIMPLE-IRA
plans can be formed and funded by the filing date.
For further information, to request a review copy of
J. K. LASSER’S YOUR INCOME TAX 2005or to schedule an interview with J.K.
Lasser spokesperson, tax attorney Donna LeValley, please contact:
Nancy Colson
Managing Director
The Alternative: Media Placement Specialists
212-246-1580/
ncolson@nyc.rr.com
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