Forward Thinking
Consider these retirement savings strategies.
Among the many obstacles small business owners face, finding and retaining qualified workers can be a significant challenge to the growth and survival of a business. Considering these challenges, in addition to the tangle of daily activities, it’s easy to overlook the long-term goal of saving for retirement. But for employers and their employees, retirement planning is essential.
For employers, a well-designed retirement plan can generate significant tax deductions and help build a more stable business.1 “Employers want to cultivate a staff that’s eager to work for them,” says Alan Kizor, senior vice president of retirement solutions at Union Bank of California. “And what better way to attract talent than with an incredible benefits package?” For employees, a retirement plan may also boost savings and lower taxes. And, of course, there’s the goal of having money in their retirement years.
Getting on track means understanding the various approaches to retirement planning. Here is a summary of the primary plans and what you should know:
Simplified Employee Pension Plan (SEP): This plan is ideal for the self-employed. A SEP allows you to make contributions, up to 25% of compensation, or as much as $46,000 in 2008, without complicated rules or a plan administrator. Investment earnings grow tax-deferred until withdrawn. Another thing to consider: The entire amount of employer contributions may be eligible as a deduction from the business’s taxable income.
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE): This approach is increasingly popular with small businesses. Those that have fewer than 100 employees who earned more than $5,000 in the previous calendar year can set up a SIMPLE IRA with either matching or non-elective contributions that range between 2% and 3% of an employee’s annual compensation. The contributions are vested immediately, and the IRA owner directs the investment. In 2008, the employee can contribute up to $10,500, which can be increased by $2,500 if the employee is age 50 or older.
Profit Sharing: This defined contribution plan uses a formula based on profits to determine annual contributions. Profit sharing plans that provide for flexible contributions are required to have substantial and recurring employer contributions, generally once every three years. Keep in mind, however, that a profit sharing plan requires equal contributions for all employees.
401(k): This widely used plan relies on a defined contribution of cash or deferred compensation. It allows an employer to provide matching contributions, thus providing a valuable employee benefit and additional tax breaks. This plan is particularly popular, Kizor says, because it allows participants to borrow from their fund. Employees also contribute and subsequently reduce their tax liability (the total contribution is limited to $15,500 for 2008, with an additional $5,000 for employees age 50 and older). However, 401(k) plans have more complex rules, can be more costly to administer and employees typically manage the investments themselves.
Never choose an approach without doing your homework and consulting your financial and tax advisors. And although it’s important to put some type of retirement strategy into action, Kizor says, it’s especially important to offer plans that are clear and simple. “The less complicated your company’s plan, the more likely it will succeed long-term.”
1 Tax implications vary. Consult your financial advisor, tax attorney or tax advisor about IRS eligibility requirements and limits on contributions to SEPs, SIMPLEs, Profit Sharing and 401(k) plans before investing or initiating.
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