By: Maria J. Miranda Cruz, CPWA®
Senior Wealth Advisor
Wealth Management Division, BPPR
Retirement is expensive. Supplementing social security income has become a reality faced by many retirees and future generations. Therefore, early planning for retirement is essential. During this process, it is important to be aware of and understand the savings vehicles specifically designed for retirement in Puerto Rico.
In Puerto Rico there are various Treasury Department-qualified vehicles through which contributions are tax-deferred until retirement. These include Individual Retirement Accounts (IRAs); 1165(e) Plans and Keogh Plans.
Individuals aiming to maximize their savings for retirement whose salaries account for 100 percent of their income can make annual contributions to an IRA or 1165(e) Plan. Self-employed individuals have the option of making annual contributions to IRAs and Keogh Plans. A Keogh Plan is a type of qualified retirement plan available for self-employed individuals, owners of unincorporated businesses, owners of more than 10 percent of a special partnership or a corporation of individuals, or individuals who earn a substantial portion of their income through self-employment. The maximum annual deductible contribution is up to 25 percent of the net income, with a limit of $53,000 for the taxable year ending on December 31st, 2015, whichever is less. Depending on the tax rate, Keogh Plans can deliver savings of up to 33 percent. Once established, contributions may be made until the tax return deadline for the applicable tax year, including any extensions.
Funds contributed to the plan are taxed when the participant receives them. The tax is determined according to whether the funds are disbursed in a lump sum or in partial payments. Funds received in a lump sum can be taxed at a special rate for capital gains while partial payments are taxed as ordinary income.
Keogh Plans are established through a trust. It is important to note that such a trust is considered a separate legal entity that provides additional protection against third-party claims. The trust receives the contributions, which can then be invested prudently. The trust is exempt from paying taxes on income generated by the investments.
For plans with more than one participant, federal regulations require that fiduciaries managing any plan that covers employees must exercise care, skill, prudence, and diligence when selecting investments. Among the factors that should be taken into consideration when making investments are: maintaining sufficient liquidity to allow the disbursement of benefits for participants who retire or resign; diversification to minimize the risk of losses; and seeking alternatives aimed at providing predictable growth without undue risks.
The type of plan is selected according to the specific circumstances of the individual or entity establishing it. Qualified types include pension, stock option and profit sharing plans. Pension plans can either be defined as benefit plans or defined contribution plans. We recommend the evaluation of vehicles such as Keogh Plans as part of your tax planning in conjunction with planning for retirement and the protection of assets. An important final point to note is that Keogh Plans, as with any other qualified retirement plan, must be established before the end of the taxable year of the participating individual or entity. The fiduciary services experts in Banco Popular’s Wealth Management division can work along with your financial advisors to help define the retirement strategies that fit you best.
The content of this material is for informational purposes only and is not intended as tax advice. Banco Popular de Puerto Rico, its subsidiaries or affiliates, do not engage in the offering of tax, legal or accounting advice. If legal, tax, or accounting assistance is required, the service of a competent professional should be sought. The contributions made to a Keogh Plan may be invested on investment products. Investment products are not insured by the FDIC, are not deposits or obligations, are not guaranteed by Banco Popular de Puerto Rico or its subsidiaries and/or affiliates. Investment products involve risks, including the possible loss of the invested principal.
Contributions in excess of the deductible limit will pay a tax equivalent to 10% even if the non-deductible contribution is not claimed as a deduction on your income tax return. For 2015, the maximum annual employer and employee contribution amount per participant will be the lesser of $53,000 or 100% of the participant’s Compensation. Also, the maximum compensation per participant to be used for determining contributions to the Plan shall not exceed $265,000.00.