Trucking & Taxes – July 2024

Many owner-operators we talk with never plan for retirement. In fact, many think they will never retire.

Many are counting on their Social Security alone for retirement planning. However, owner-operators are always looking for ways to reduce taxes. When you reduce your income to save taxes you are also reducing your Social Security taxes and wage base, which reduce Social Security benefits. Now is a great time to make sure you have a sufficient plan for retirement.

Where to begin

Start with evaluating your spending and savings. Do you have enough to retire? How much do you need to retire? Are you saving enough monthly?

Based on a study by the U.S. Department of Labor, Social Security will only partially replace the average American’s pre-retirement income.

In talking with our investment advisers, an owner-operator making $75,000 a year will require 70 to 80% of that in retirement – approximately $60,000. That $60,000 per year compounded by the average post-retirement lifespan of 20 years means you will need about $1.2 million. OK, it’s not necessary to set aside that whole sum in advance. A part of it would come from earnings from investments, retirement programs or Social Security.

Depending on age and year of retirement Social Security will only cover roughly $25,000 to $29,000 of the $60,000 needed annually. You can go to SSA.gov to determine your future benefits.

The earlier you start saving for retirement, the better. A 35-year-old will have about $1.4 million when he retires if he deposits $500 into a retirement fund each month until he is 67 and his funds increase by 10% annually. A 45-year-old will have slightly more than $495,000 at age 67 if he invests the same amount and makes 10%. What a difference 10 years can make.

Social Security

You can start collecting Social Security payments at full retirement age (66-67 years old, depending on your birth year), or early (at age 62).

If you plan to start receiving them before full retirement age, it is crucial to know that your Social Security benefits are reduced. If you collect Social Security and continue to work, a portion of your monthly payment may be temporarily withheld. The earnings test applies to people who collect retirement and have not yet reached full retirement age. It also applies to those who have earnings above a certain level.

The threshold changes annually, tracking national wage trends. In 2024, beneficiaries who will not reach full retirement age until a later year have $1 withheld from their Social Security payment for every $2 in work income above $22,320 (up from $21,240 in 2023).

In the year you reach full retirement age, $1 is withheld in Social Security benefits for every $3 in earnings above $59,520 (up from $56,520 in 2023) until the month when you hit the milestone. At full retirement, the earnings test expires and there is no longer any work-related deduction, and the SSA adjusts your benefit upward so that, over time, you recoup the prior withholding.

Now, let’s take a look at some of the other options for retirement plans.

Traditional IRA

An IRA allows you to make tax-deferred contributions of $7,000 annually, with a $1,000 catch-up contribution cap for anyone 50 years of age and above. Contributions to an IRA are tax-deferred and lower your taxable income if not enrolled in an employer-sponsored plan. Merely a portion of your IRA contribution is deductible if you or your spouse contributes to an employer-sponsored plan, like a 401(k). With rare exceptions, you are not allowed to withdraw your IRA money before the age of 59.5 without paying a substantial penalty.

Roth IRA

The terms of contributions and payouts are where a standard IRA and a Roth IRA diverge. Contributions to a Roth IRA are taxed in the year they are made because they are not subtracted from income. However, they do grow tax-deferred, and upon withdrawal, they are free from taxes.

SIMPLE IRA

Companies with fewer than 100 employees were the target market for the SIMPLE (Savings Incentive Match Plan for Employees) IRA. You and your workers are eligible if you employ others. An employee of your company may contribute to a SIMPLE IRA up to $16,000 in 2024, with a $3,500 catch-up contribution cap for individuals 50 and older. You may also match contributions made by your employee up to $16,000.

SEP IRA

A Simplified Employee Pension plan allows an employer to contribute up to 25% of net income (up to $69,000 total) to an IRA set up for himself or his or her employees. After money is put into the plan, it must stay there until the owner turns 59.5. Early withdrawals are subject to federal income taxes and a possible 10% penalty.

Individual (Solo) 401(k)

A different type of tax-deferred savings option called 401(k) retirement plan was previously only available to employees, frequently with an employer match to encourage savings. However, since 2001, anyone has been able to open a solo 401(k) with an annual contribution cap of $23,000, provided that they are paying themselves a salary and are considered employees of their own company, such as in an S Corp structure. There are additional complicated rules if you work for yourself.

Roth 401(k)

The Roth 401(k) is a more recent retirement plan option that combines the benefits of both the single 401(k) and the Roth IRA. Contributions are taxed once in the year they are made, and then never again. The ideal choice for an owner-operator, according to many financial advisers, is a Roth 401(k) depending on tax bracket and future tax rates.

The safest bet is to assume that taxes will rise eventually, so paying now locks in a lower rate. It is ideal to pay as much in taxes as possible when you are younger, not in retirement.  Also, consider your tax bracket. Consult your investment adviser and tax preparer.

Tips

• The bottom line is to start saving as soon as you can. Time is of the essence when it comes to retirement planning.
• To make it easier to save money, use payroll deductions that are taken out automatically or automatic investment features of many products.
• Use the retirement plans to invest for retirement and never touch them even if in temporary financial hardship.

Retirement investments should be more aggressive the younger you are.

Review your portfolio with an investment adviser periodically to shift your allocation from risk to more secure as you age or become closer to retirement.

Retirement investments accumulate value over time. If you wait another five, 10, 20 or 30 years to consider your retirement, you will never accumulate the savings you need.

It’s time to start investing if you hope to have a comfortable retirement someday. We advise having a conversation as soon as possible with an investment adviser. LL