How Do IRS Retirement Plans Work for the Self-Employed in Business?
Do IRS retirement plans work for the self-employed in business? Two major factors to consider are taxes and deductions. First, self-employed tax deductions are for business expenses. Second, if you make contributions (withdrawals) to an IRA from your business account, the deductible amount is counted as a business expense and taxed accordingly. However, it’s possible to contribute after deducting this money as income.
Some self-employed people deduct up to 100% of their traditional IRA retirement plan contribution and another 20% on top – using those numbers for simplification purposes here. For example: If you’re in the 15% tax bracket, you can deduct up to $13,500 (plus an additional $3,000 if over 50 years old). Any additional non-deductible funds put into an IRA will then be added toward future tax years’ contribution limits – which could increase your take-home pay.
Secondly, if you’re a sole proprietor with no corporation tax liability – and pay self-employment taxes under the SE tax code – you can deduct traditional IRA contributions as a business expense on your personal income tax return rather than as part of your SE tax return. This will be a significant advantage for many years to come because self-employment taxes are currently at about 15% vs. the 25% rate for corporations, and future rises appear inevitable; for example: When Social Security Tax goes up from 12.4% (of income) to a projected 15.3%.
However, while the self-employed person can deduct the full amount of traditional IRA contributions from their gross income – and pay less in taxes overall – it’s important not to make more withdrawals than you made during the same time period for investments or savings purposes because any advantage gained by initially deferring taxes will be lost if those funds are taken out before retirement ages; this is similar to 401(k)s, regular IRAs and other retirement plans. In addition, subsequent withdrawals early on may also result in penalties due to early withdrawal fees that are imposed in many cases.