Law in the Marketplace: Business start-ups and IRAs

Most individuals who start new businesses in New Hampshire are fairly young when they do so — roughly in their late 20s to early 40s. And they should know not only about their businesses but also at least the basics about IRAs, qualified plans, ESAs and HSAs, and they should know that just as one’s younger years are often the best time to start a new business, they are also the best time to start these plans. The younger the better.

Here are the basics you should know about IRAs, qualified plans, ESAs and HSAs:

— IRA is the acronym for “individual retirement account.” There are two main types of traditional IRAs: SEP-IRAs and SIMPLE IRAs. SEP-IRAs are mainly for individuals with no employees. SIMPLE IRAs are for individuals who are employers or employees in small businesses.

— Both types of traditional IRAs provide a triad of important federal income tax advantages: First, contributions to IRA trust accounts are deductible from participants’ taxable income; second, the appreciation of the funds in these accounts are not subject to federal tax; third, when participants withdraw funds from their IRAs, they usually do so after their retirement, when their federal income tax rate is much lower than before retirement.

— There are also federally tax-favored retirement arrangements called “qualified plans” — eg, 401(k) plans. However, the establishment and maintenance of these plans can be complex and expensive, so they are not usually suitable for smaller businesses.

— IRAs and qualified plans can be either “traditional” plans — ie, the kind described above; or they can be “Roth” plans — ie, plans to which contributions are not deductible but withdrawals from which are not taxable.

— Two types of plans that have certain federal income tax similarities with IRAs and qualified plans are

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