The clock continues to tick. Your retirement is one year closer.
You have time before December 31 to take steps that will help you fund the retirement you desire. Here are four things to consider:
1. Establish Your 2020 Retirement Plan
First, a question: As you read this, do you have your (or your corporation’s) retirement plan in place?
If not, and if you have some cash you can put into a retirement plan, get busy and put that retirement plan in place so you can obtain a tax deduction for 2020.
For most defined contribution plans, such as 401(k) plans, you (the owner-employee) are both an employee and the employer, whether you operate as a corporation or as a proprietorship. And that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.
2. Claim the New, Improved Retirement Plan Start-Up Tax Credit of Up to $15,000
By establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan), a SIMPLE IRA plan, or a SEP, you can qualify for a non-refundable tax credit that’s the greater of
- $500 or
- the lesser of (a) $250 multiplied by the number of your non-highly compensated employees who are eligible to participate in the plan, or (b) $5,000.
The credit is based on your “qualified start-up costs,” which means any ordinary and necessary expenses of an eligible employer that are paid or incurred in connection with
- the establishment or administration of an eligible employer plan, or
- the retirement-related education of employees with respect to such plan.
3. Claim the New Automatic Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)
The SECURE Act added a nonrefundable credit of $500 per year for up to three years beginning with the first taxable year beginning in 2020 or later in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE plan.
The new $500 auto contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans. Further, you don’t have to spend any money to trigger the credit. You simply need to add the auto-enrollment feature.
4. Convert to a Roth IRA
Consider converting your 401(k) or traditional IRA to a Roth IRA.
If you make good money on your IRA investments and you won’t need your IRA money during the next five years, the Roth IRA over its lifetime can produce financial results far superior to the traditional retirement plan.
Having a retirement plan is a good money strategy for most business owners because it creates savings that you are unlikely to tap and that enable compound tax-free (Roth) or tax-deferred growth.
So step one is to get your plan in place before December 31 so you, the business owner, can make both employer and employee contributions. This is true even when you operate as a one-person corporation or proprietorship.
If you have employees, make sure to take advantage of the tax credits for (a) start-up of the plan and (b) establishing automatic contributions (opt-outs are available, of course).
Seriously consider converting your existing accumulations to a Roth IRA. The long-term savings here can be huge.
Make sure to leave the converted funds in the Roth for at least five years.