Opinion

Piershale: A simple idea to save taxes

If you are a small business owner, you may want to consider a very popular small business company retirement plan called a “SIMPLE IRA.” There is a reason why it is called “simple.” It’s about as easy to open as an IRA, with larger contribution limits, and opening this plan will not prohibit you from buying a personal IRA.

If you have 100 employees or fewer, you can set this plan up. Employees, including the employer, are allowed to contribute up to $12,500 a year, all tax-deductible. For those age 50 or older, there’s a $3,000 catch-up provision, allowing you to put in up to $15,500 a year.

Here’s why small business owners love this plan.

1. You’re allowed to put “all” of the first $15,500 of your salary ($12,500 for those younger than 50) into this plan, as long as you pay the FICA tax. In other words, if the owner’s spouse, or any other part-time employee, earns approximately $17,000 a year, they actually can put $15,500 of it into this plan, and receive a $15,500 tax deduction. The rest would be to cover FICA tax.

2. If the employee doesn’t contribute to the plan, there’s no “requirement” for the employer to put any money in on behalf of that employee. If the employee does contribute, then the employer is required to match up to the first 3 percent of that employee’s annual compensation. This means the small business owner is only required to reward employees willing to save money for themselves.

3. A small business owner who has a spouse and who works in the business, even part-time, can make a “combined” contribution of up to $31,000 a year, all tax deductible ($15,500 each) if they are both age 50 or older. Plus, the employer can do another 3 percent match of both spouses’ salaries into the plan and deduct it, since it’s considered a business expense for the owner.

4. This plan is free from the much more complicated ERISA reporting required with plans of larger companies. There is no requirement to file a complicated 5500 tax form, no non-discrimination rules limiting the contributions of the owner or better-paid employees, and very minimal overall paperwork (am I dreaming?).

The business owner may establish this plan on any date between Jan. 1 and Oct. 1 to contribute for that year.

Remember, sometimes the “simple” ideas are the most effective.

• Mike Piershale, ChFC®, RFC®, is president of Piershale Financial Group. If you have financial questions on this column, contact us at Piershale Financial Group, Inc., 407 Congress Parkway, Crystal Lake, IL 60014. You may also email mike@piershalefinancial.com.

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