Tax Tips for Small Business

How Bush Tax Law Increased Retirement Plan Wealth-Building

The Bush tax law adds $40 billion of tax relief to what was already the largest legitimate tax shelter in the U.S. economy: the tax-favored retirement plan. If you're a self-employed person without employees, here's how the law enriches the retirement plans--Keogh plan, SEP, SIMPLE and IRA--that you might adopt.

• Larger deductible contributions to a Keogh "money purchase" type of pension plan--as high as $40,000 a year.
  
• Larger deductible contributions to a Keogh profit-sharing plan. Deduction can now be as large as with money purchase plans.
  
• Larger elective deferrals for 401(k) profit-sharing plans, now making 401(k)s the preferred plan for most self-employeds.
  
• Larger annual retirement benefits under a Keogh "defined benefit" type of pension plan--allowing a pension as high as $160,000 a year. This and other changes allow higher deductible contributions to such plans.
  
• Larger deductible contributions to SEP (also called SEP IRA) plans--as high as $40,000 a year.
  
• Larger contributions to SIMPLE (SIMPLE IRA) plans--as high as $16,000 in 2003, higher in later years.
  
• Larger after-tax (nondeductible) contributions to Keogh plans. These are contributions owner-employees make wearing their employee hat.
  
• A deductible catch-up contribution wearing the employee hat for owner-employees age 50 or over: up to $2,000 in 2003, higher in later years. Available for contributions to 401(k)s; for SIMPLEs the contribution ceiling is halved (up to $1,000 in 2003).
  
• Larger contributions to traditional or Roth IRAs--as high as $3,000 in either case (not more than $3,000 in all if combined) for 2003--2004; higher in later years.
  
• New catch-up contributions to traditional or Roth IRA for persons age 50 and over, up to $1,000 for 2003--2005, higher thereafter. This catch-up contribution is in addition to deductible catch-up contribution described above (contribution as employee made to 401(k) or SIMPLE plan).
  
• Tax credit allowed low-income taxpayers for plan contributions, available to self-employed persons for contributions to a SEP or SIMPLE, or Keogh after-tax contribution as employee. A comparable credit is available for contribution to a traditional or Roth IRA. The maximum credit (rarely available) is $1,000.
  
• Rollovers from IRAs to Keoghs are now allowed and may, within limits, include after-tax contributions.
  
• Plan loans are eased. Department of Labor approval to borrow from your own plan is no longer required. Loans are now allowed up to $50,000.
  

The preceding article was reproduced with permission from Self-Employment Retirement Planning News, the newsletter accompanying the Handbook Self-Employed Retirement Planning, 2003 Edition. The Handbook describes in detail the retirement wealth-building benefits available under rules in effect 2003 and after.