Most tax provisions for retirement allow you to shift taxable income from your working years, when you are probably in a higher tax bracket, to post-retirement years when you may be living on less. With a Roth Individual Retirement Arrangements (IRAs), on the other hand, you may choose to pay tax now on money that you tuck away in a retirement plan, and then pay no tax at all when you withdraw the money after you retire.
What types of retirement plans can I use if I’m self-employed?
One advantage of being self-employed is that you generally have more choice over the type of retirement plan you choose to invest in. You may even be able to contribute more to a retirement plan than you could as an employee.
I choose the IUL with National Life Group as a self-employed taxpayer. It can grow up to 13% return, tax-free , with living benefits added at no cost and creates an estate to my children with a stroke of a pen.
The following retirement plans are popular with self-employed taxpayers:
Individual Retirement Arrangements (IRAs). You may be able to contribute $5,500 per year to an IRA (for 2013). If you or your spouse are covered by a retirement plan at work, however, you may not be allowed to contribute to an IRA, depending on your income level. Taxpayers age 50 or older can contribute an extra $1,000 per year.
IRAs are easy to open at a financial institution. If you have a retirement plan from an old job, you can even roll your old 401(k) or similar plan into your IRA.
The major disadvantage to an IRA is the relatively low contribution limit. It’s hard to make your account grow quickly when you can only add $5,500 to $6,500 per year.
Simplified Employee Pensions (SEPs) for self employed. A SEP is a written arrangement that provides business owners with a way to contribute to traditional IRAs for each qualifying employee. If you’re self-employed, you can make contributions to a SEP for yourself, even if you have no employees.
SEP plans are easier to establish and maintain than 401(k)-type plans.
You can generally contribute more to a SEP than to an IRA. The limit is 25% of your self-employment income, up to a maximum contribution of $51,000. That’s almost ten times the maximum contribution to an IRA for individuals under age 50.
Your self-employment income for this purpose is reduced by your deduction for self-employment taxes paid.
Savings Incentive Match Plans for Employees (SIMPLE) IRAs. A SIMPLE plan is similar to a SEP plan, except it allows for employer matching of contributions.
Should I pay off my house or buy an annuity?
You’ve reached or are close to retirement age, and you have a nest egg. You are trying to decide whether to use it to pay off your house or place it in an annuity or other income producing fund for retirement. Which should you do?
You can look at the decision in a couple of different ways. The most straightforward way is to compare the interest rate you pay on your house to the interest you will earn on an annuity.
For example, say you pay a fixed interest rate of 4% on your home mortgage. You are deciding between paying off the mortgage or investing in a five-year annuity that would pay you 2.7%. You are generally better off paying the mortgage because you can save more interest than you would earn with the annuity. (You would also have some tax differences, which you can estimate by entering different scenarios into TaxACT.)
There’s more to the decision than comparing interest rates, however. You also want to plan for financial security. Before you pay off your house, make sure you will have enough monthly income in retirement.
Paying off your home or making other investments is a very personal decision. For many people, having the house paid off gives them a sense of security. It’s also a goal that helps motivate them to save and work toward over the years. For others, it may matter less. They’d rather have the money available as an income stream.
Consider your total financial picture, your life stage, and your personal preferences and what makes you feel secure before you make a major decision such as this one.
How Much Can I Earn and Still Get My Social Security Check?
As long as you have reached your full retirement age, you can earn as much as you want and still get your full Social Security benefits. This has been true since the “Senior Citizens Freedom to Work Act of 2000” became law.
However, if you’re taking Social Security benefits before your full retirement age (66 for people born in 1943 to 1954) and you have earned income, your benefits may be reduced. In that case, your benefits are reduced by $1 for every $2 you earn over the annual limit. The limit is $15,120 in 2013.
The year you reach full retirement age, you can earn more before your benefits are reduced. In addition, your benefits aren’t reduced for every dollar you earn over the limit. Until the month you reach full retirement age, your benefits are reduced by $1 for every $3 you earn over the annual limit of $40,080 (for 2013). The month after your birthday, you can start working as much as you want without worrying about reducing your Social Security benefits.
There’s still incentive to work, even in the years that your benefits are reduced if you do so. First, your benefits are not reduced dollar for dollar by your earnings. You still get to keep one out of two, or one out of three, of your hard-earned dollars, depending on how close you are to retirement age. (Of course, you also pay tax on it.)
Another incentive to keep working if you can is that if your benefits are reduced because you earned income, your future benefits are increased to take that into account.
I forgot to take the required minimum distribution from my retirement plan. What happens now?
After you reach age 70 ½ and retire, you must take a minimum distribution from most retirement plans or face a stiff penalty from the IRS.
For traditional IRAs, you must start taking the minimum distribution by April 1 of the year after you reach age 70 ½, regardless of whether you are retired. For 401(k) plans, you must begin taking distributions by April 1 of the year following the later of the year you reach age 70 ½ or the year you retire.
Roth IRAs have no age requirements for when you must start taking distributions. Required minimum distributions begin after the death of the owner.
Unless you have the distribution set up to be sent to you automatically, it’s easy to forget to take that distribution before the end of the year, or to take less than the full amount. That can mean a steep penalty – 50% of the distribution you should have taken.
Before you pay that penalty, see if you can remedy the situation. The IRS can waive the penalty if you can show that the shortfall was due to reasonable error, and that you are taking steps to remedy the shortfall.
When you need to request a waiver, click the Federal Q&A tab, click to expand Retirement Plan Income, and click the section with your name and Request for waiver of penalty on excess accumulation in retirement plan.
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408-854-1883 in 50 US states , motherhealth@gmail.com 1708 Hallmark Lane San Jose CA 95124
