Whether you’re a dance solopreneur or a dance business with employees, here are some options for where to accumulate your retirement savings and the tax advantages to be had along the way.
It’s never too early, or too late, to begin building a retirement fund. The sooner you start, of course, the easier it will be to accumulate a substantial nest egg. Contribute as much as you can each month, but even modest monthly contributions can become big investments, given enough time to grow. Here are some options for placing your retirement savings and the tax advantages to be had along the way.
Types of Retirement Savings Accounts
You can save for retirement through regular investment options, such as buying stocks through a brokerage firm, mutual fund or app; obtaining CDs from your bank; or buying U.S. Savings Bonds through Treasury Direct. Even better, you can use tax-advantaged retirement accounts, such as 401(k) plans, SEPs and IRAs (explained later). The benefits of most of these accounts are as follows:
- Contributions are tax-deductible. This means that instead of paying taxes to the government, you are effectively paying some of the money to yourself. For example, if you are in the 24 percent tax bracket and contribute $6,000 to an IRA (the contribution limit for 2022), your tax savings from a deduction is $1,440. If you’re 50 or older by the end of 2022, your IRA contribution limit is $7,000, which in the same tax bracket produces a tax savings of $1,680. In effect, you’d only have to come up with $5,320 to have the full $7,000 contribution; the balance can be funded with a tax refund that results from the deduction.
- Contributions may also qualify for a tax credit (“double dipping” for the same dollars contributed). Depending on your income, the retirement savers credit can be as much as $1,000 off your federal tax bill.
- Earnings within the retirement account are tax-deferred. This effectively allows for compounding; all your earnings on your investments continue to work for you without any diminution for current taxes. You don’t pay tax until you take distributions.
Two retirement plan options—Roth IRAs and designated Roth accounts that are part of 401(k) plans—have different tax advantages. While contributions are not tax-deductible, distributions may become tax-free if certain conditions are met.
Retirement Plans for Solopreneurs
If you have no employees, you have a wide array of retirement plans to choose from. The main difference in plans is the deductible contribution limit. Here are some plans to consider:
- A solo 401(k) allows you to set aside up to $67,500 in 2022. This is composed of a maximum employee deferral of $20,500, a catch-up contribution of $6,500 if you’re age 50 or older by end of the year, and an employer contribution of $40,500 (“employer” meaning you). How much you actually contribute depends on your income (your salary if your business is incorporated or your net income from self-employment) and what you can afford. This calculator will help you figure that out.
- A SEP allows you to contribute up to $61,000 in 2022. However, the contribution cannot be more than 25 percent of wages up to $305,000. For self-employed individuals, because the net earnings on which the contribution is based must be reduced by one-half of self-employment tax and the contribution itself, the formula works out to a maximum of 20 percent of net earnings.
- An IRA has a 2022 contribution limit of $6,000 ($7,000 for those age 50 and older). The same contribution limit applies to Roth IRAs, but, as explained earlier, is not tax-deductible. The limit applies to the total combined contribution to an IRA and a Roth IRA.
Retirement Plans for Dance Businesses With Employees
If your business has employees, you usually have to include them in your company’s plan if you want to save for retirement through a tax-advantaged plan. Keep in mind that employer contributions are tax-deductible. What’s more, your business may be eligible for one tax credit, or even two, for setting up a plan.
The cost of any employee benefit plan is always a concern for small businesses. Whether you have to make contributions to employees’ accounts depends on the plan you select.
- If your company offers a 401(k) plan, you are not required to contribute; employees can make their own elective deferrals to the plan out of their paychecks. But you probably want to contribute to (1) offer a valued employee benefit and (2) simplify requirements for the plan.
- If you choose to offer a SEP, which is a simplified type of retirement plan that does not require any annual filing with the government, you must contribute to employees’ accounts; they do not make contributions.
- If you choose a SIMPLE IRA, you must make certain modest contributions. Employees may choose to make elective deferrals.
You can compare your options through IRS Publication 3998, “Choosing a Retirement Solution for Your Small Business.”
What to Do Before Year-End and Before Tax Day
As the year winds up, it’s not too late to set up and fund a retirement plan. Get the advice you need to select the best one for your situation by consulting your CPA or other tax or financial advisor. Watch the deadlines for making contributions:
- IRAs: 2022 contributions can be made up to April 18, 2023 (the due date of your 2022 tax return). An extension of time to file your return does not give you more time to make the contribution. If you use a tax refund to make some or all of your contribution, be sure to file your return early enough for a trustee or custodian to receive it, and indicate that it’s meant for the 2022 tax year (use the 2022 version of IRS Form 8888 for this purpose).
- 401(k)s and other qualified retirement plans: You have until the extended due date of your return to make contributions. For example, if you are self-employed, a SEP for 2022 may be set up and funded through October 16, 2023, if you obtain an extension of time to file your 2022 federal income tax return. However, if your plan covers employees who can opt to make elective deferrals from their wages, there are certain deadlines to give notice to them about participation that may curtail the contribution period.
Once you know which plan, decide where you want to maintain it—a brokerage firm, mutual-fund company, bank or other financial institution. Be sure to check on fees and investment options offered for the institution plan you select.
The Bottom Line
Before you know it, the future is now and it’s time to retire. Live the lifestyle you want by planning ahead. Find more information about IRAs in IRS Publication 590-A and about retirement plans for small businesses in IRS Publication 560.
Barbara Weltman, an attorney and small-business expert, is the author of J.K. Lasser’s Small Business Taxes 2022: Your Complete Guide to a Better Bottom Line, and publisher of “Idea of the Day” at bigideasforsmallbusiness.com.