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Accounting and Tax Tips Blog

Traditional employees aren’t the only ones who can access tax-advantaged retirement accounts. In fact, freelancers and contractors have even more options for retirement savings. Two of the best retirement plans for small businesses include simplified employee pension (SEP) IRAs and traditional IRAs. However, there are a few key differences between these programs. Here’s what you need to know.

best retirement plans

Why Choose a SEP IRA?

One of the best retirement plans for small business owners is the SEP-IRA. The main advantage of a SEP IRA is the larger contribution limit. For 2020, you can contribute up to 25% of your earnings. However, there’s a maximum limit of $57,000. If you have employees, you must match contributions for them if they qualify. A SEP IRA is a good option if you want to maximize your yearly contributions. These accounts can provide added flexibility at tax time.

Traditional IRA Benefits

Another one of the best retirement plans for small business owners is the traditional IRA. For a traditional IRA, the contributions are set at a maximum of $6,000 if you are under the age of 50 and $7,000 if you are age 50 or older. A traditional IRA offers the option to obtain a tax deduction which will lower your adjusted gross income and ultimately your tax liability. You won’t have to pay any taxes on the contributions that you make until you withdraw the funds or you are age 70½. In addition, you can also maintain a traditional IRA even if you have other retirement plans. The contributions are also protected from creditors during a bankruptcy.

Where to Deduct a SEP IRA on Your Tax Forms

You should use Line 28 on your 1040 to report qualified retirement contributions. This includes IRAs and SEP IRAs. However, use Schedule C to claim contributions for employees.

IRA Deductions on Your Tax Return

For traditional IRAs, you may take a tax deduction for that contribution by reporting it on Line 32 of Form 1040, IRA deduction. You can take this IRA deduction regardless of whether you take a standard deduction or you choose to itemize your deductions.

Small Business IRA Requirements

For both traditional and SEP IRAs, you must meet certain filing and eligibility requirements in order to set up these retirement plans. The limit for individual contributions to a traditional IRA is $132,000. For married couples filing joint returns, the limit for a traditional IRA is $194,000.

To establish a SEP IRA, a 1099 contractor must establish an agreement to provide benefits to all eligible employees of a business, even if you have none. Qualified employees must earn $600 to qualify. They also must work for your company for three of the previous five years to qualify.

If you need advice on setting up an individual retirement account, contact Shared Economy CPA for further assistance.