Retirement planning not only helps you assure a financially secure future, but it also can reduce your current tax burden.
“Anyone in the real estate business should sock away as much as they can,” says Martin Press, a board-certified tax attorney with Gunster Yoakley in Fort Lauderdale. Your strategy should be determined in part by your age and how much you can afford to contribute, he says.
“A defined benefit pension plan gives you the most bang for the buck,” Press says. Solo plans are especially helpful for high-income earners ($100,000 or more a year) not far from retirement. This strategy, which specifies a target amount to be paid to you annually after retirement, allows very large deductible contributions to fund the defined benefit. If you have plenty of available cash to contribute and have dragged your feet on retirement planning, this is the way to go. It is not for do-it-yourselfers, though. You’ll need an experienced professional to administer the plan.
The Simplified Employee Pension IRA allows you to exclude up to $45,000 of income per year. For self-employed individuals, this plan is relatively easy and inexpensive to set up and vesting is immediate. However, if you have employees, it’s important to understand who is eligible to participate and your required contributions. Press cautions that without expert advice you can run afoul of some obscure provisions of the law. “It seems like a simple idea, but you really need a tax person to make sure you’re doing it right,” he saysThe solo (or individual) 401k is a fairly recent variation of the popular workplace retirement plan. Solo 401k accounts allow individual proprietors to put away money on two levels—as an employer and employee—up to a maximum of $45,000 a year, or $50,000 at age 50. In some brackets, this can add up to roughly twice the benefit of a traditional 401k. At higher income levels, though, the advantage dissipates because of the cap.
And don’t forget the benefits of IRAs. They are uncomplicated and inexpensive to set up, so they’re an option even when income drops, especially if you are not covered by another retirement plan. Traditional IRAs can provide immediate tax relief. The maximum contribution will increase from $4,000 in 2007 to $5,000 in 2008, and from $5,000 to $6,000 for those over age 50. Contributions to Roth IRAs are not deductible now, but distributions after age 59½ generally are not taxed.
Remember, though, you are dealing with the IRS. Requirements, restrictions and penalties apply to all of these accounts. When in doubt, consult an expert.