Beauty Entrepreneur Retirement Tax Planning Opportunities - 3 Things To Do Before The Ball Drops
This is a PSA:
Pay Your Future Self, Not The Government!!!
This week we are talking about Retirement Planning! This is a very important topic because a lot of Beauty Entrepreneurs find themselves having to work well beyond their years because they failed to save enough money to retire.
"One of the pitfalls we face as hairdressers and salon owners is that, more often than not, our jobs do not provide us with pension plans, medical insurance, paid vacation, or other benefits packages compared to other professions.
As a result, many in our profession end up living paycheck to paycheck and seldom take the time to think about their futures when it comes to financial and retirement planning, which is a mistake none of us can afford to make."
-Jon Gonzales, Beauty Industry Author, Motivational Speaker, Business Consultant & Educator Beauty Salon Owners & Hairdressers
This doesn't have to be you!
Here Are 3 Crucial Things To Know When It Comes To Saving For Retirement:
✅ Try to start as young as you can. Take advantage of the power of TIME and COMPOUNDING INTEREST. You increase your savings potential and the power of compounding interest by fully utilizing the time you have.
✅ No amount is too small. Because of the POWER of TIME and COMPOUNDING INTEREST, small amounts can amount to larger returns in 30+ years!
✅ The right retirement plan can save you money on your taxes - either currently or in the future depending on your goals.
Now...on to the Tax Planning Strategies!!!
Tax Planning Strategy #1 (THE MUST DO!) - Establish Your 2021 Retirement Plan BEFORE 12/31
First, a question: As you read this, do you have your (or your corporation’s) retirement plan in place?
If not, and if you have some cash you can put it into a retirement plan, get busy, and put that retirement plan in place so you can obtain a tax deduction for 2021.
For most defined contribution plans, such as 401(k) plans, you (the owner-employee) are both an employee and the employer, whether you operate as a corporation or as a proprietorship. And that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.
There are very few things you can do to save on taxes for 2021 after the year ends. However, if you establish a retirement plan on or before 12/31, you can currently deduct any money you contribute to the plan up until your 2021 tax return due date.
Tax Planning Strategy #2 - Claim the New, Improved Retirement Plan Start-Up Tax Credit of Up to $15,000
By establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan), a SIMPLE IRA plan, or a SEP, you can qualify for a non-refundable tax credit that’s the greater of
the lesser of (a) $250 multiplied by the number of your non-highly compensated employees who are eligible to participate in the plan, or (b) $5,000.
The credit is based on your “qualified start-up costs,” which means any ordinary and necessary expenses of an eligible employer that are paid or incurred in connection with
the establishment or administration of an eligible employer plan, or
the retirement-related education of employees with respect to such a plan.
Tax Planning Strategy #3 - Claim the New Automatic Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)
The SECURE Act added a non-refundable credit of $500 per year for up to three years, beginning with the first taxable year (2020 or later) in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE plan.
The new $500 auto-contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans. Further, you don’t have to spend any money to trigger the credit. You simply need to add the auto-enrollment feature (which does contain a provision that allows employees to opt-out).
Tax Planning Strategy #4 - Convert to a Roth IRA
Consider converting your 401(k) or traditional IRA to a Roth IRA.
If you make good money on your IRA investments and you won’t need your IRA money during the next five years, the Roth IRA over its lifetime can produce financial results far superior to the traditional retirement plan.
You first need to answer this question: How much tax will you have to pay to convert your existing plan to a Roth IRA? With this answer, you now know how much cash you need on hand to pay the extra taxes caused by the conversion to a Roth IRA.
Here are four reasons you should consider converting your retirement plan to a Roth IRA:
You can withdraw the monies you put into your Roth IRA (the contributions) at any time, both tax-free and penalty-free because you invested previously taxed money into the Roth account.
You can withdraw the money you converted from the traditional plan to the Roth IRA at any time, tax-free. (But if you make that conversion withdrawal within five years of the conversion, you pay a 10 percent penalty. Each conversion has its own five-year period.)
When you have your money in a Roth IRA, you pay no tax on qualified withdrawals (earnings), which are distributions taken after age 59 1/2, provided you’ve had your Roth IRA open for at least five years.
Unlike with the traditional IRA, you don’t have to receive required minimum distributions from a Roth IRA when you reach age 72—or to put this another way, you can keep your Roth IRA intact and earn money until you die. (After your death, the Roth IRA can continue to earn money, but someone else will be making the investment decisions and enjoying your cash.)
If you do nothing else...Establish a plan on or before 12/31
At a minimum, establish a retirement plan on or before 12/31. This will ensure that you can make your tax-deductible retirement contribution for 2021 (even if made during Q1 of 2022).
Book your FREE Discovery Call TODAY to learn more about how ColemanTax can assist you and your Beauty business!