The retirement account is one of the best tax management tools that real estate associates have at their fingertips. Not only can you sock away pretax dollars, but you can also reduce tax liabilities by setting up and funding such accounts, which have come a long way in the last few years.
If you aren’t taking advantage of this self-employment benefit, you’re not alone. According to the IRS, just 5 percent of small business owners and employees are covered by retirement plans.
Here’s a look at the three popular retirement options for Realtors:
SIMPLE-IRA
Key advantage: Salary reduction plan with little administrative paperwork.
Eligibility: Any business with 100 or fewer employees that does not currently maintain any other retirement plan.
Your responsibilities: Set it up by completing IRS Form 5304-SIMPLE or 5305-SIMPLE. No employer tax filing required. The bank or financial institution handles the bulk of the paperwork.
Maximum annual contribution per participant: Employee--$8,000 for 2003. Employer—Either match employee contributions dollar for dollar up to 3 percent of compensation or contribute 2 percent of each eligible employee’s compensation.
Minimum employee coverage: Must be offered to all employees who have earned at least $5,000 in the previous two years.
SEP-IRA
Key advantage: Easy to set up and maintain.
Eligibility: Any business with one or more employees.
Your responsibilities: Set up plan by completing IRS Form 5305-SEP. No employer tax filing required.
Maximum annual contribution per participant: For 2003, the lesser of 25 percent of compensation or $40,000.
Minimum employee coverage: Must be offered to all employees who are at least 21 years of age, have been employed by the business for three of the preceding five years and have earned at least $400 in a year.
401K
Key advantage: Permits employee to contribute more than in other options.
Eligibility: Any business with one or more employee.
Your responsibilities: Consult with a financial institution or employee benefit provider as there is no model form used to establish a plan. The plan requires an annual filing of IRS Form 5500 and special testing to ensue that it does not discriminate in favor of highly compensated employees.
Maximum annual contribution per participant: Employee $12,000 for 2003. Employer/Employee combined – up to a maximum of 25 percent of compensation or $40,000.
Minimum employee coverage: Must be offered to all employees at least 21 years of age who worked at least 1,000 hours during the previous year.
