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Tax-Deferred Accounts: IRA, SEP, 401(k)

Posted on: September 8, 2020

By: Matt Andersen, CPA, Founder of MD Andersen CPA, PA

There are several ways to prepare for retirement, including savings in tax-advantaged accounts such as an IRA, SEP, or 401(k). These accounts defer taxes until when you retire and withdraw the money, and may also offer immediate tax savings. Let’s dig a little deeper into each account.

Individual Retirement Account (IRA)

With a traditional IRA, you can make pre-income tax savings, and pay your taxes upon withdrawal. The IRS taxes the withdrawals according to the income tax rate at that time. Your savings are also tax-deductible. When you contribute from your income, the IRS deducts that amount from your taxable income.

There are limits to the amounts you can save. For example, the cap for the 2019-2020 tax year is $6000 for those under 50 and $7000 for those above 50 years. However, there are Roth IRA accounts that don’t tax you upon withdrawal but also aren’t tax-deductible. These accounts are great if you prefer to pay taxes now instead of deferring them until retirement.

Simplified Employee Pension Plan (SEP)

SEP-IRA are savings plans that allow you to save in a traditional IRA account if you’re self-employed, own a business, or work as a freelancer. They work like traditional IRA accounts and allow tax deductions. SEPs are flexible for businesses of any size and offer low administrative costs and small entry amounts. Generally, as long as you’re above 21 years of age, you can adopt Form 5305-SEP and acquire an SEP. The annual contribution for 2020 is capped at $57,000 or 25% of compensation.

401 (k)

A 401 (k) is an employer-sponsored savings account recognized under the law. Usually, there are traditional and Roth 401 (k) accounts. With traditional accounts, you can deduct savings from your taxable income, and pay the taxes upon withdrawal. With Roth accounts, you make contributions post-tax, but make tax-free withdrawals in the future. The maximum amount an employer can direct to a 401 (k) varies per tax year. For example, in 2019 annual cap for employees under 50 years was $19,000 and $25,000 for those above 50.

Are you looking for retirement saving options? You have many options and we are here to help. Contact us today so we can get you the best retirement account available for your personal financial situation.


 

Matt Andersen, CPA loves analyzing data, people, and businesses. He is passionate about helping entrepreneurial-minded clients achieve their goals, keep more money in their pockets, and live a higher quality of life. In addition to tax and accounting services, Matt provides one-on-one coaching for various topics including lifestyle entrepreneurship, advanced tax planning, and new business creation. 

 

 


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