Retirement Plan Choices for Self-Employed Individuals

Slide 1 Retirement Plan Choices for Self-Employed Individuals Tax Exempt and Government Entities Employee Plans 2008 IRS Nationwide Tax Forum Good afternoon. Introduce yourself and provide your qualifications for speaking. Today we are going to talk to you about the different retirement plan options for self-employed individuals. We will be looking at this from the standpoint of a sole proprietor, as well as an 1120 employer, both with and without a few employees. We would like you to walk away from this presentation knowing that one size does not fit all when it comes to choosing a retirement plan and that employers need to look at many different factors when deciding which retirement plan option to choose for themselves and

their business. This presentation, along with the notes, will be posted to our web site, www.irs.gov/ep, in September after the final Tax Forum in San Diego. So if you miss anything during my discussion, please visit our web site to view the presentation. Slide 2 Tax Advantages of Retirement PlPlans • Contributions deductible by employer • Contributions not taxed until distributed ─ Exception: Designated Roth accounts • “Catch-up” rules for employees age 50 and older • Money in retirement plan grows tax-free • Tax credits for low- and moderate- income savers and for small employers for set-up costs So why offer a retirement plan? It can provide important tax advantages to a business owner. Contributions to the plan may be deducted when contributed, so less tax will be paid. Employer contributions, employee contributions, if permitted under the plan, and earnings on the contributions are not taxed until they are distributed to the employee, and then the employee pays the taxes on the distribution. An exception to the second bullet is a Roth IRA or a designated Roth account. With a designated Roth account, the employee makes contributions with after-tax dollars. All qualified distributions from Roth accounts are tax-free, including the earnings on the account. Designated Roth accounts in a 401(k) plan will be discussed in more detail later in the presentation. Today, there are more incentives to start and participate in a retirement plan. Recent tax law changes have increased the contribution amounts that are deductible for 401(k) plans and IRAs, for example. Participants age 50 or older can save additional amounts to help “catch up” on their savings as they near retirement. In addition to being able to deduct contributions, small employers can claim tax credits for the cost of setting up certain plans. Tax credits for low- and moderate-income savers are available based on a person’s adjusted gross income. This is sometimes called the “Saver’s Credit.” Slide 3 BasicBasic Types of Rof Retirementnt Plans:: 1) Defined contribution plans ─ Individual accounts ─ Benefit is the accumulated contributions plus earnings at retirement 2) Defined benefit plans ─ Traditional pension plan that promises a specified benefit at retirement ─ Employer contributions must be sufficient to fund the promised benefits There are two basic types of retirement plans: defined contribution plans and defined benefit plans. The first group we will discuss today is defined contribution plans. Defined contribution plans are the...

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