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Even if you are fairly close to retirement and believe that you have a good idea of your company’s value, changing economic conditions, new competition in your market or a host of other unknown factors can make it difficult to be sure what your business will be worth when you’re ready to retire.
That’s why CPAs advise self-employed business owners to set up a retirement account that will provide them with a reliable nest egg. And there are many tax-advantaged options that can help maximize the value of your savings.
Many people are aware of two long-standing options for the self employed: SEP IRAs and SIMPLE IRAs. The Simplified Employee Pension (SEP) IRA is available to sole proprietors, partnerships and corporations. If self-employed, you can contribute up to 20 percent of your net business profit each year, to a maximum of $49,000. (Net business profit is defined as the income of the business after expenses, and minus half of the self-employment tax.) If incorporated, you can contribute the lesser of 25 percent of compensation, or $49,000.
SEP IRAs are relatively easy to establish. You can open one through a bank or other financial institution. You can contribute each year as late as the due date for your income tax return, including extensions.
Because you have several options, you can choose the type of tax advantages that work best for you. With a SEP or SIMPLE IRA or what we’ll call the traditional model of the solo 401(k), your initial contributions are deducted from your pretax income. You do not pay taxes on that income now, but you do pay taxes on your withdrawals in retirement.
With a Roth solo 401(k), your current contributions are not deducted from your pretax income, but your withdrawals from the account upon retirement may be tax free. With all these choices, the investment earnings on your contributions are tax free until retirement.
Your CPA can offer advice on a wide range of business questions, including which retirement plan option best suits your need. Be sure to consult your local CPA for valuable suggestions to address all your financial concerns. And to get a sense of the many ways in which CPAs can help small businesses, visit the American Institute of CPAs 360 Degrees of Financial Literacy site dedicated to small business needs.
Copyright 2011 American Institute of Certified Public Accountants.