Retirement Plans For Small Business Owners

Choosing to begin a small business retirement plan opens doors to savings and tax advantages for both the owner and the employees

. Not only does a retirement package create an avenue to help your employees and yourself save for the future, but it may also help you to appeal to and retain competent employees. Funds contributed by the employer are tax-deductible, therefore lowering the employer's taxable income. Employee contributions are not taxed (other than Roth contributions) until they are withdrawn in retirement. Your investments increase tax-free.

The three most common retirement vehicles are Individual Retirement Arrangements (IRAs), defined contribution (DC) plans, and defined benefit (DB) plans.

IRA-based plans can be established by an individual or by an employer. Contributions are made by the employer or the employee, and in some cases, both. The amount available at retirement depends on the amount placed in the IRA, and the additional earnings, or negative losses accrued over time. Payroll deduction IRAs are available even if an employer does not adopt a retirement plan, and allows for direct, tax-deductible contributions to be made by employees. Simplified Employee Pensions (SEPs) can be established for the employer as well as employees. Contributions can vary year to year, but must include a uniform percentage of pay for each employee. Simple IRA plans allow employees to contribute a percentage of their income, but also requires employer contributions.

Defined contribution plans are employer established, and can be contributed to by the employer as well as the employee, often at a set rate. At retirement, the employee receives the contributions plus earnings, or minus the losses, accrued over the life of the plan. Examples of defined contribution plans include 401(k) plans for tax-deferred investing, automatic enrollment 401(k) plans, safe harbor 401(k) plans that require employer contributions, and profit sharing, which allows an employer to provide larger, separate, and varied contributions for each employee.

Defined benefit plans guarantee a certain benefit at retirement (for example, $500 per month). These benefits are commonly calculated based on a percentage of salary, multiplied by the total number of years an employee worked for the company. Typically, DB plans offer a larger benefit at retirement, and are costly to establish and maintain. In general, though, the employer can contribute more to these plans, and therefore deduct more. A pension would be an example of a defined benefit plan.

Setting up a small business retirement saving plan can be easier than most small business owners think. Many financial institutions provide services to set up and maintain your choice of plans. It's best to consult with a financial advisor to determine which plan will best suit your small business needs.

by: Wesley Watkis

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