Retirement Plans Bring Big Benefits to Small Business
By: Darryl R Ruffin, MBA
Even when you love what you do, there may come a day when you need to step away from work. If you’re a small business owner building your business, that day may seem too far away to worry about. But even if you’re not preoccupied with funding your own retirement, you better believe your employees are thinking about it — and they view it as a very valuable perk of employment. With the range of retirement plans available today, along with improvements designed to ease the load of paperwork for employers, it may be less burdensome than you think to offer some form of retirement benefit to your employees.
Aside from being the right thing to do, offering a retirement plan can significantly enhance your business. It’s a competitive advantage that can help improve employee morale and increase retention. Your employees benefit from consistent, automatic and tax-advantaged saving. Depending on the plan you choose, you may not be required to make employer contributions, but if you do, those contributions are tax deductible. And you can participate in the plan you establish, to help save for your own financial future. Here’s a brief introduction to your options for retirement savings to help you take the plunge.
SIMPLE IRA plans
A SIMPLE IRA plan is one of the easiest ways to help your employees save for retirement. It requires minimal paperwork and no IRS reporting. When you establish a SIMPLE IRA plan, your employees can contribute up to 100 percent of income (up to $11,500 limit for 2011 or $14,000 if over age 50). For 2011, employers can match up to 3 percent of the eligible employee’s compensation or $11,500 (whichever is less) or can choose to make a non-elective contribution of 2% of each eligible employee's compensation. Your employer contributions are tax deductible. The retirement assets reside in self-directed accounts, meaning your employees decide how the assets are allocated across a variety of investment vehicles. This option is only available to you if you have 100 or fewer employees, and you generally must establish your plan by October 1st of the contribution year. A word of warning: while all plans impose a penalty for early withdrawal, withdrawing from a SIMPLE IRA plan within the first two years of participating in the plan may result in a whopping 25 percent penalty.
SEP IRA plans
A Simplified Employee Pension plan (SEP) is another easy way to help your employees save for retirement. Like the SIMPLE IRA plan, it requires minimal paperwork and no IRS reporting on behalf of the employer. With a SEP IRA, the employer makes a defined contribution, on a pre-tax basis, to an individual retirement account (IRA) established for each eligible employee. SEP IRA plans allow an employer to establish certain minimum eligibility requirements for employee participation. Additionally, because an employee must establish an IRA to receive employer contributions, they may also make traditional IRA contributions to their IRA. For 2011, you may contribute up to 25 percent of each employee’s gross income or a maximum of $49,000. You are not required to contribute to your employees’ plans every year, lending some flexibility in the event of a down year. However, in the years you do contribute, you must fund the plans of all eligible employees. As the business owner, you may create your own SEP IRA and make contributions toward your own retirement.
401(k) plans
A 401(k) plan is a defined contribution plan that you can establish to help your employees save. The plan is funded primarily by your employees with elective salary deferrals up to allowable limits. For 2011, the deferral limit was $16,500. You can choose to make matching contributions, which are tax-deductible. The savings in a 401(k) plan are typically invested in self-directed investments such as mutual funds. These plans are highly regulated and require more plan administration that SEP or SIMPLE IRA plans.
Other retirement benefit options
In addition to SIMPLE, SEP and 401(k) plans, there are other ways to help your employees prepare for retirement. Options such as profit sharing plans and employee stock ownership plans (ESOPs) are complex and regulated; consult a certified financial planner who can help you explore whether they make sense for your business.
Saving with an IRA
If you’re not in a position to start a business-based retirement plan for you or your employees, do yourself a favor and fund a traditional or Roth IRA for yourself. You can contribute up to $5,000 per year ($6,000 if you’re 50 years old or above). When you fund a traditional IRA, your contributions generally are tax deductible. Upon withdrawal, distributions will be subject to ordinary income tax. The deductibility of your IRA contributions depends on your adjusted gross income and whether or not you or your spouse participate in a workplace retirement plan. Contributions to a Roth IRA depend only on your adjusted gross income. For 2011, the income limit for a Roth IRA contribution is $122,000 for a single tax filer and $179,000 for a married joint tax filer. The Roth IRA is funded with after-tax dollars, allowing you to take tax-free withdrawals in retirement if certain holding period requirements are met.
Get help from the experts
The IRS and the Small Business Administration provide free resources to help small businesses establish retirement plans. Go online and read up on your options. Find a financial advisor who is well versed in retirement planning for businesses, including the laws in your state. A financial advisor can also provide individual consultations with your employees to help them make the most of their savings. Your employees will appreciate the benefits of a retirement savings plan — and so will you.
Darryl R. Ruffen, MBA, is a financial advisor with the practice of Gracy and Associates, a financial advisory branch of Ameriprise Financial. Darryl is licensed/registered to do business with U.S. residents only in the states of MA, ME, NH, NJ, VA, GA. Gracy and Associates is located at 175 Andover St., 3rd Floor, Danvers, MA 01923, (978) 777-8382.
Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients.
Ameriprise Financial does not provide tax or legal advice. Consult your tax advisor or attorney.
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