Retirement Plans 101

Individual Retirement Accounts (IRA)

An individual retirement account is a savings account with tax advantages that individual can use to save and invest long-term.  An IRA encourages people to save for retirement.  Anyone who has earned income can open an IRA and enjoy the tax benefits these accounts offer.  There are limits on how much can be contribute each year and there can also be early withdrawal penalties of 10% if the money is withdrawn before age 59 ½. 

Generally, contributions to a traditional IRA account are tax deductible. 

The 2021 limits for IRA contributions are $6,000 per person ($1,000 catchup if you’re age 50 or older). 

SEP-IRA

The SEP is the easiest business retirement plan to setup. 

For self-employed clients, the amount contributed cannot exceed the lesser of:

  •  25% of their net self-employment income, or
  • The annual limitation which is:
    • $66,000 per year for 2023,
    • $61,000 per year for 2022
    • $58,000 per year for 2021

If the business is incorporated, this contribution is calculated based on covered compensation.  Under a SEP, the business must contribute the same percentage for their employees as they do for the officers of the company. 

SIMPLE IRA’s

A SIMPLE IRA plan allows employees and employers to contribute to traditional IRAs set up for employees.  It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.

Employees are eligible to contribute an annual amount out of their paycheck.  The amount of elective contributions are as follows:

  • 2022-$14,000 per year plus a $3,000 year catchup for employees age 50 or over.
  • 2021-$13,500 per year plus a $3,000 catchup for employees age 50 or over. 

In addition, employers are required to match up to 3% of eligible compensation or 2% of non-elective contribution for each eligible employee. 

401(k) Plans

Employees agree to have a percentage of each paycheck paid directly into an investment account.  The employee may match part or all of that contribution. 

A solo or individual 401(k) plan is meant just for the business owner and spouse.  A solo 401(k) does not require a third-party administrator and may not require an annual Form 5500 filing.

Contribution limits:

Employee Elective Contributions:  For 2021, the annual limit on employee contributions is $19,500 per year for workers under age 50, and for 2022, the limit is $20,500.  For workers age 50 or up, an additional $6500 catch-up contribution is permitted. 

Employer Contributions.  For 2021, the maximum amount of contributions is capped at $58,000 or 100% of employee compensation whichever is lower.  If we include the catch-up contribution for those age 50 and up, the limit is $64,500. 

For 2022, the maximum amount of contribution is capped at $61,000 per year.  If we include the catch-up contribution for those age 50 and up, the limit is $67,500.  

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