“Tax Now” means you pay taxes on this item now, but you don’t have to pay the taxes on the accumulated amount when you retire.
“Tax Later” means you save taxes now, but you have to pay the taxes on the accumulated amount when you retire.
IRA stands for Individual Retirement Account.
| NAME | DESCRIPTION | TAX NOW vs. TAX LATER | WHAT DOES IT MEAN FOR US? |
| Traditional IRA | A traditional IRA is a retirement account in which individuals can make pre-tax contributions and the investments in the account grow tax-deferred. In retirement, the owner pays income tax on withdrawals from a traditional IRA. | Tax Later | Some taxpayer’s may be able to reduce their tax liability now if they contribute to the Traditional IRA by 04/15 of that tax year. Use the Traditional IRA Calculation Worksheet to solidly figures and provide information to the client. |
| ROTH IRA | A Roth IRA it allows qualified withdrawals on a tax-free basis if certain conditions are satisfied. It was established in 1997 and named after William Roth, a former U.S. senator from Delaware. | Tax Now | This does not impact the individual tax return. If a client provides you information on this, you can disregard this. |
| SEP IRA | A Simplified Employee Pension (SEP) plan provides business owners with a simplified method to contribute toward their employees’ retirement as well as their own retirement savings. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each plan participant (a SEP-IRA). | Tax Later | This can be used to decrease taxes in the current tax year for business owners. Use the SEP IRA Calculation Worksheet to solidly figures and provide information to the client. For those with Corporations (opposed to Sole Proprietorships) owners can only contribute up to 25% of their wages (W2) through the corporation. If they don’t issue payroll to themselves, they can’t make a SEP IRA contribution. |
| Defined Benefit Plan | An employer-based program that pays benefits based on factors such as length of employment and salary history. Benefits can be distributed as fixed-monthly payments like an annuity or in one lump-sum payment. | Tax Later | The business owner can take a substantial expense and put the money into their Defined Benefit Plan. This helps high net worth clients reduce taxes overall. The client does have to commit to making the contribution for 5 years – so it is vital that they make consistent income. The amount they contribute varies based on their W2 for the owner, age, gender, and other factors that need to be assessed and calculated. |
| 401(k) Plan | A 401(k) is a retirement savings and investing plan that employers offer. A 401(k) plan gives employees a tax break on money they contribute. Contributions are automatically withdrawn from employee paychecks and invested in funds of the employee’s choosing (from a list of available offerings). 401(k)s have an annual contribution limit of $19,500 in 2021 and $20,500 for 2022 ($26,000 in 2021 and $27,000 in 2022 for those age 50 or older). | Tax Later | This decreases wages on Box 1, thereby decreasing the taxable income for that specific tax year. When an employee leaves the employer they should move the funds to a different retirement account as the fees associated with maintenance of the account will eat into the retirement fund. In addition once the employee leaves they cannot continue contributing to this Plan. |
| Solo 401(k) Plan | A solo 401(k) is an individual 401(k) designed for a business owner with no employees. In fact, IRS rules say you can’t contribute to a solo 401(k) if you have full-time employees, though you can use the plan to cover both you and your spouse. | Tax Later | Owners can contribute to both the Solo 401(k) plan as well as the SEP IRA. The contribution limits are the same as a 401(k) plan. However by contributing to both the SEP IRA and the Solo 401(k) you can decrease the Business’s Income as well as the Individual’s W2 on their personal return. |