With the holiday season in full swing, most small business owners find themselves focused on year-end sales and the outlook for 2015, while attempting to take well-deserved vacations and reconnect with family and friends.
Unfortunately, in the middle of the holiday craze, many business owners often overlook important tax and retirement-planning tasks that can have a significant impact on retirement savings -- not to mention their tax bill next spring.
According to the IRS, Americans will require as much as 80 percent of their annual income to retire comfortably in their golden years.
This holiday season, don’t forget to check a few important items off your tax and retirement planning list that could help you reach your retirement goals and maximize your company's bottom line.
1. Catch up on your 401(k) or IRA contributions.
As you think about presents you'll bestow this year, take advantage of the gifts the IRS can provide, namely opportunities to contribute to an individual retirement account or 401(k) while deferring taxes.
Every year, the IRS sets new limits on retirement savings account contributions. But if you're 50 or older, you can also make catch-up contributions. This is a gift from the government to help ensure that those approaching retirement age are as prepared as possible.
If you have a 401(k) and are 50 or older, you can contribute as an individual an additional $5,500 to your account or $23,000 in 2014. The limit will rise to $24,000 in 2015. If you're younger than 50, you can contribute $17,500 on a tax-deferred basis to a 401(k) in 2014 and $18,000 in 2015.
2. Set up a company retirement plan.
According to the most recent Spark Business Barometer report commissioned by my company, Capital One, only 24 percent of 400 small businesses surveyed offer a 401(k) or retirement plan. This quarterly national survey, conducted in October by APCO Insight, polled for-profit U.S. companies with less than $10 million in annual revenue.
If you don’t currently have a company retirement plan, you can still set up a traditional 401(k) plan and reap the personal tax-deferred savings benefits for 2014.
As long as your plan is purchased by Dec. 31, your company has until the tax-filing deadline (March 17 for S corporations or C corporations and April 15 for limited liability companies and sole proprietors) to make employer profit-sharing contributions and receive tax benefits for 2014.
Small business owners can reduce their business taxes by turning their 401(k) into a profit-sharing plan. While it’s possible for any business to profit share as much as $52,000 for highly compensated individuals, people who are self-employed and participating in an individual 401(k) plan may be better positioned to maximize such deferrals (since they only have to profit share with themselves and other owners).
You may also be able to minimize plan costs by taking advantage of government tax credits and deductions. Businesses starting their first plan with fewer than 100 employees might qualify for tax credits as high as $500 to offset setup and administrative costs for three years, and employer contributions are tax deductible for the firm.
To qualify for tax credits, a business must have at least one employee besides the owner who earns less than $115,000 a year. The credit is equal to 50 percent of administration and setup charges for the 401(k) and can be as much as $500. But this tax credit doesn't apply to individual 401(k) plans.
Talk through retirement and business-planning decisions with a financial consultant and tax advisor.
3. Consider a Roth option.
In addition to contributing to a 401(k) or IRA, you might consider a using a Roth plan as well. Roth IRAs and 401(k)s allow for a different way to manage tax liability.
With traditional 401(k)s and IRAs, you put away money for retirement tax-deferred, then pay taxes when you take out money. With a Roth plan, the scenario is reversed. You pay taxes on the money now but generally can access the assets tax-free upon retirement.
While employees can make after-tax contributions to a Roth 401(k), employer contributions must be made tax-deferred (not through a Roth plan), and therefore taxes will be owed when funds are withdrawn.
No one can predict how tax rates will change in the future so putting aside some money in each form of an IRA and a 401(k) may help you hedge your bets.
To withdraw assets from a Roth IRA tax- and penalty-free, initial contributions have to have been made five years prior. Not everyone qualifies for contributing to a Roth IRA.
In 2014, only single people with a modified adjusted gross income lower than $107,000 (or $169,000 for a married couple filing a joint return) can invest in a Roth IRA and make the maximum contribution. But you might still be able to make a contribution, depending on where your income falls on a sliding scale.
These restrictions do not apply to 401(k)s. Anyone can participate in a Roth 401(k) if it's offered by a company’s plan. If your plan provider doesn’t offer the option, don’t be shy about requesting it, as it can typically be added in with an amendment to the plan offering.