Retirement savings is one of the important aspects of each client’s life. So, Dr. Rastogi needs to make sure that each client gets the most tax savings as per the IRC tax code in saving and investing for retirement planning. So, the first question comes, at what age our clients should start retirement savings? As a part of tax savings strategies, earlier you start better your retirement savings can be. Dr. Rastogi makes sure that all his clients get tax savings in establishing a sound retirement plan as early as possible.
Retirement savings start with maximizing social security especially for those who are self-employed. This is important that a business owner forms the right business entity and maximizes the social security contribution with self-employed business income. Social security benefits will be the first source of income for most of the clients. In some entity formation such as in S corporation, a client can divide the total income between social security taxable income and nontaxable profit but in future social security benefits will be reduced too.
Besides social security contribution, a business owner can also have retirement plan under IRA, SEP IRA, 401k Plan, Individual 401 K Plan, ROTH IRA and MY RA. Dr. Rastogi can advise a client for the formation of right business entity and take maximum deduction for the retirement plan from the business income. This will help in reducing taxable income for a client and building a financial nest for the future. All these plans have different annual limits for contribution. These limits of contribution may change on year to year basis. For 2020, retirement plan contribution limits for various plans are given below:
IRA and Roth IRA – $6,000 and $1,000 catch up for age 50 and over
401 K – $19,500 and $6,500 catch for age 50 and over
SEP IRA – 25% of the self-employed income but maximum up to $57,000 or total contribution in all retirements plans up to $57,000.
Usually, a client must open a retirement account with an investment bank to invest retirement funds for growth. A client can invest in equities, bonds, or treasuries except in real estate. A detailed description of different choices for investment is outlined in investment planning.
There are some new changes in Tax law under the secure act and care act for retirement plan contribution age and RMD (required minimum distribution). Under these two new acts, the age limit for the contribution has been taken away and an individual can contribute to the retirement plans as long as they wish to do so. Secondly, those who reached 70 ½ years of age in 2019 can delay their RMD until they reach 72 years of age.
In general, the selection of retirement plan and contribution in the plan will impact tax savings and it will be included in Tax Preparation. All funds contributed to the retirement plans are tax-deferred for federal taxes. However, for states, each state has its own rules for tax deferment. Some states such as Pennsylvania do not have any tax deferment for retirement plan contributions. All growth of the retirement funds is also tax-deferred until it is withdrawn, or distribution is taken from the retirement savings. The minimum age for taking a distribution from the retirement plans is 59 ½ years without any early distribution penalty. In general, for early distribution before 59 ½ years can have a penalty of 10% on the withdrawal amount from the retirement savings. Dr. Rastogi can advise a client on how to optimize retirement savings and maximize the growth of retirement savings.
