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Employee Benefits
Choose the Right Small-Business Retirement Plan
By Johnny Lowe
Financial Advisor, Merrill Lynch
If you run a small business, you’ve got a lot to think about: Cash flow, competition, customer loyalty…the list goes on and on. And, if you’re like most small-business owners, you work a lot longer than a “forty-hour” week. So, you may not have had the time to think about setting up a retirement plan for yourself and any employees you may have. But you should make the time — because a comfortable retirement is worth planning for.
Fortunately, it’s a great time for small-business owners to choose a good, cost-efficient retirement plan. In recent years, new tax laws have made it easier for you to pick a plan that can help you save for retirement and, if necessary, attract and retain quality employees.
So, here’s the question you should ask yourself: “What type of retirement plan is best for my business?”
Before you select a specific plan, keep in mind that the most common types of retirement plans offer these features:
Tax-deferred growth of earnings — When you invest in a “tax-qualified” retirement plan, you’ll pay no taxes on your earnings until you start taking withdrawals. Consequently, your money will grow faster than it would if placed in an investment on which you paid income taxes every year.
The ability to make tax-deductible contributions — Because you typically contribute “pre-tax” dollars to your retirement plan, you’ll lower your adjusted gross income. As a result, you may lower your annual tax bill.
A variety of investment options — You can fund your retirement plan with a variety of investments: stocks, bonds, mutual fund-type accounts, government securities and more.
Beyond sharing these traits, though, small-business retirement accounts differ in contribution limits and other factors. Let’s look at a few of these plans:
Plans for self-employed (no employees)
Owner-only 401(k) — When you establish an “owner-only 401(k),’’ you can put up to 25 percent of your compensation into a profit-sharing plan, plus $14,000 (in 2005) as 401(k) contributions. If you’re 50 or older, you can even put an extra $4,000 into your 401(k). (However, you can’t contribute more than $42,000 per year if you’re under age 50, or $46,000 annually if you’re 50 or older.)
Furthermore, both the 401(k) and 50-and-over “catch-up’’ limits will be increasing over the next several years, so you’ll be able to put away even more money for retirement. Plus, you can transfer most retirement plan assets — such as profit sharing and money-purchase plans — into your owner-only 401(k).
SEP –IRA — For 2005, you can put in the lesser of $42,000 or 25 percent of your compensation to a SEP-IRA. Eligible compensation is capped at $210,000. You can set up a SEP-IRA for your business with a minimum of paperwork, and you won’t have to file any annual reports on the plan, such as the Form 5500.
Plans for business owners with employees
SIMPLE IRA — As its name suggests, a SIMPLE IRA is easy to set up and inexpensive to administer. In 2005, employees can contribute up to $10,000 to their SIMPLE IRA ($12,000 if age 50 and over). Your business is generally required to match your employees’ contributions up to three percent of their salary, unless you decide to put in two percent of each eligible employee’s compensation. If you choose the matching option, you can reduce the match to between one percent and three percent in two of every five years.
Safe Harbor 401(k) — By following some specific guidelines, you can set up a Safe Harbor 401(k) — a plan that offers the same features of a traditional 401(k), but without the burdensome non-discrimination testing required to identify excessive contributions by highly compensated employees. Employees’ contribution limits are the same as those described in the “owner-only’’ 401(k). The key benefit of the Safe Harbor 401(k) is that you, as the business owner, can contribute up to the annual maximum (in 2005, that’s $14,000, or $18,000 if 50 or older), regardless of how much your employees contribute.
Choose your plan wisely…
By selecting the right retirement plan for your business, you can go a long way toward ensuring the type of retirement lifestyle you’ve envisioned. So, look over your options, consult with your tax adviser — and make the choice that’s right for your needs.
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