Saving for Retirement Tax Benefits Can Help
Setbacks in the financial markets and a long road to economic recovery haven’t made the job of saving for retirement any easier. But if you have a 401(k) or similar retirement savings plan at work, there is some good news: The basic tax benefits you receive as a plan participant are still in place. You can take advantage of them to help build up your savings.
If you contribute to your plan on a pretax basis, you see one tax benefit of plan participation every payday. Your contributions aren’t included in your taxable wages for federal (and possibly state) income-tax purposes. Your full contribution goes into your plan account, but some of that money is effectively put back into your pocket in the form of immediate tax savings.
Tax Deferral on Earnings
Plan investment earnings are also tax deferred. Not having to withdraw money from your savings every year to pay income taxes on earnings means you can leave more money invested.
Distributions from a pretax plan account are generally taxable. However, if you change jobs or retire, you may roll over eligible plan distributions tax free into another employer’s plan or an individual retirement account (IRA). A rollover delays income taxation. In general, you must begin taking annual required minimum distributions (RMDs) once you reach age 70½.
Some plans allow participants to make after-tax Roth contributions. Although there’s no upfront tax benefit, you do get another meaningful tax break: After you reach age 59½ and meet other requirements, distributions from a Roth account are income-tax free.
The tax law generally limits 401(k) salary deferrals to $17,000 in 2012 — plus another $5,500 in catch-up contributions for individuals age 50 or older. Check your plan for details regarding its contribution limits. If you’re not maximizing your contributions, you’re missing out on valuable tax benefits and the chance to accumulate savings for your future.
How Much Do You KnowAbout an LLC?
You may know that LLC stands for limited liability company. And you probably could name several businesses whose formal names end with LLC. Here are some things you may not know.
- An LLC generally protects its owners from personal liability for business obligations in much the same way a corporation does, but an LLC is not a corporate entity.*
- The owners of an LLC are called “members.” There is no limit on the number of members an LLC can have, and members don’t necessarily have to be individuals. Members’ management roles are typically spelled out in an operating agreement.
- An LLC may borrow money in its own name and is responsible for repayment of the debt.
- An LLC is usually treated as a partnership for federal income-tax purposes. (The remaining two points assume partnership treatment.)
- LLC members are taxed directly on company income. The LLC itself doesn’t pay federal income taxes.
- If an LLC has a loss, its members generally can deduct their share of the loss on their own tax returns.
- Before structuring your business as an LLC, consider the advantages and disadvantages from both a tax and a nontax perspective.
* Each state has its own laws governing LLCs. Consult with an attorney before establishing an LLC.
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