At the beginning of each new year, many people resolve to plan for their retirement and to get serious about saving. So now is a good time to review saving strategies. The first step to any savings program is to maximize retirement plan funding. From a tax savings standpoint, investing in a retirement plan is equivalent to taking money from one pocket and putting in the other while saving taxes in between.

Plan options vary, depending on whether you are self-employed, own a business, or are an employee. Some plans have to be set up and funded prior to year-end, but others can be established and funded up until the due date of the return, including extensions.

In addition to saving for your own retirement, you can help your employees and reduce your tax liability by sponsoring a qualified deferred compensation plan such as a pension, profit-sharing, 401(k), or simplified employee pension plan (SEP). You receive a tax deduction for your contributions to employees’ accounts, and your employees get the benefits of tax-deferred savings.

If you have a 401(k) plan, make certain you are maximizing your deferrals for 2017 ($18,000 annually plus a $6,000 catch-up deferral if you are over age 50). If your plan provides a Roth option, you can defer all or part into a Roth 401(k). The deferrals will be after-tax dollars, but the benefit is that the retirement distributions from the Roth account will be tax-free (contributions and earnings).

The design of 401(k) options depends on the owner/employee makeup. The goal should be to design the plan so that you are maximizing your total available individual contribution ($54,000 in 2017 plus the $6,000 catch-up, if over age 50).

For self-employed individuals, a simplified employee pension (SEP) may be a good alternative. The total contribution limits are the same as a 401(k) plan, and contributions are computed based on a percentage of net self-employment income.

In addition to the above, the individual retirement account (IRA) is a vehicle to put away an additional $5,500 in 2017 if you are under age 50 or $6,500 if you’re over 50. The IRA can be funded in addition to the 401(k) and SEP but may not be deductible depending on your adjusted gross income. Still, the contributions grow tax deferred in the IRA; and the contributions, since not tax deductible when made, are not taxed when withdrawn.

It’s not too Late for Some Taxpayers to Reduce 2016 Taxes

If you’re eligible, you may qualify to make tax-deductible contributions to IRAs by April 18, 2017, and still reduce your 2016 tax liability. You may contribute up to $5,500 if single, or $11,000 if married ($6,500 and $13,000 respectively if you are over age 50).

An additional benefit at this time of year is that a SEP can be set up and funded until the due date of the business’s tax return (or until the extended due date) and still reduce your 2016 tax liability. Employers and self-employed individuals may take deductions up to 25 percent of total eligible compensation, after deductions for SEP contributions and self-employment taxes. The SEP limit for 2016 is $53,000.

If you’re interested in establishing a retirement plan or have questions about the deductibility of contributions to a plan, contact a qualified tax advisor who can help you understand the advantages and disadvantages of various plan options so you can decide the type of plan that will meet your specific needs.

It’s never too soon to start planning for retirement. But if you think you’re too young to be worried about retirement … or if “retirement” sounds like a far-off concept … think of it as saving for your financial freedom! Start the year off right with a sound plan that will allow you to achieve your financial goals.

Click here for more in-depth information on 2016 and 2017 retirement plan contribution limits and phase-out ranges.

carter-lucy-kraft-cpas-dec-16Lucy Carter, CPA, is a member of KraftCPAs PLLC and practice leader of the firm’s healthcare industry team. You may contact her via email at For more information, visit