By Catherine Friend White
FinArc, LLC Investment Management
Retirement Plans: How to Choose the Right One
In order to stay competitive in today's business world, successful businesses of all sizes are creating retirement plans. The owner's plans for retiring, the history and future of the company, budgetary constraints, and the number and type of employees, all impact the choice of plan. Here are the highlights of common plans as a guide.
SIMPLE-IRAs
Self-employed individuals, sole proprietors, partnerships, sub-chapter S corporations, and professional corporations are all eligible. The plan is funded by employer and employee contributions. The employer's contribution is set between 1% and 3% of the employee's salary. The employer has to match any employee's contribution up to that limit, and makes no contribution if the employee doesn't save. Employees can add up to $6,000 per year, as long as they earned that much. This type of plan is low-cost, easy to set up and administer, and there is no annual IRS reporting.
PROFIT SHARING PLANS
Contributions are based on the firm's profits. The company only has an obligation to pay during good years, giving them flexibility. All types of companies are eligible. The plan is funded by employer contributions.
Tax-deductible contributions are up to 15% of earned income with a maximum of $30,000 per participant. Flexible eligibility and vesting schedules are allowed in this type of plan. Profit sharing plans are also ways to encourage employee participation in a growing or expanding business. It rewards them for helping increase the company's revenues while keeping down costs.
401(k)s
Firms with over 30 professionals should consider qualified retirement plans, such as 401(k)s. They have higher administrative costs but can be less expensive per employee than the plans mentioned above. In 401(k)s, the employee funds up to 15% of their salary. Employer contributions are discretionary. The maximum contribution per year is $10,500.
DEFINED BENEFIT PLANS
For those who want to shelter the maximum amount of income allowable, DB (defined benefit plans) may be the solution. The annual contribution cannot exceed the firm's profits, but can be any percentage, constrained by actuarial assumptions.
By taking the steps to choose the right retirement plan for your business, you can give yourself and your employees a much brighter retirement picture at a reasonable cost.
Winter 2001 - Volume 11, Number 1