Self-Employed Retirement Savings
Blog contributed by Ryan L Masterson, CPA, ABV, CFE, CVA & Partner with Kemper CPA Group LLP.
Being self-employed typically provides more flexibility with respect to discretionary expenses. Retirement savings may be manipulated by the self-employed as cash flow allows in many cases. Significant fluctuations in income from year to year is also more likely than someone working for a salary.
Individuals who are not self-employed but wish to make retirement contributions through their employer plans must have done so through wage deferrals prior to the calendar year end. The only option after year-end is to potentially make IRA contributions by April 15th.
The same is not true for many who are self-employed. Business owners may postpone fully funding retirement contributions deducted on their 2019 return until the extended due date which is September 15, 2020 if a partnership, S-corporation or Corporation. Those filing as sole proprietors have until October 15, 2020 if an extended income tax return is filed. Of the plans available, SEP IRAs are one of the least costly, easiest to setup and can be setup after the calendar year end. SEP stands for Simplified Employee Pension. Contributions to tax deductible SEP IRAs are limited to the lesser of 20% of self- employment income after deducting self-employment tax or $56,000 for 2019. The deadline to setup a SEP IRA is the due date of the return including extensions noted above.
For self-employed individuals who may receive an influx of payments in the last few days of the year utilizing retirement plans with flexible contribution deadlines and high maximum deferral limits can be a great tool to help even income year to year and minimize income tax paid over time.
An ounce of prevention, or in this case planning, may be worth a pound of cure. When prevention or planning is not possible, there are still options. We may be late in the year and near the tax filing deadline but tax planning opportunities are still available for those who own their own business.
