Which Retirement Plan Is Best for You

Barbara Weltman If your business is profitable, you have a great opportunity to save money for your retirement on a tax-advantaged basis. You can cut your taxes and put money that would have gone to Uncle Sam into a plan that works for you. Qualified retirement plan options include a SEP, a SIMPLE plan, a 401(k) plan, a profit-sharing plan, a money purchase plan and a defined benefit plan. Or you can use a payroll-deduction IRA. In order to select the right plan, assess your goals and situation carefully.

Maximum savings
If you want to save as much as possible for yourself, consider the following plans:

  • Defined benefit plans- plans that effectively target the pension you will receive and then actuarially figure the contributions required to fund this pension. The older you are, the greater your required contributions, all of which are tax deductible. Caution: This type of plan works best if you have no employees or few employees all of whom are considerably younger than you (otherwise the cost of this plan can be prohibitive).

  • 401 (k) plans - these plans allow you to make both employer and employee contributions on your behalf (even if you are not an employee, but are self-employed). Dollar limits dictate how much you can contribute annually. The funds you have on retirement depend on how successful your investment of contributions has been through the years.

    For profit-sharing plans and SEPs, the rate of contribution you receive is the rate you must use for employees. For example, if you want a 25% contribution for yourself (the maximum permissible rate), you must contribute 25% of compensation for year of your employees. There are no employee contributions to these plans.

    Minimum cost for employees
    If you want to save some money for retirement but are concerned about the cost for covering your employees, consider the following plans:

    401(k) plans-contributions are funded through salary reductions of employees. Employers are not required to make any contributions on behalf of employees, although many do so in order to encourage employee participation in the plan.

    SIMPLE plans - contributions are funded through salary reductions of employees. Employers are required to make certain minimum contributions.

    For example, you can choose to match employee contributions dollar for dollar up to 3% of compensation.

    Minimum plan maintenance
    In addition to the cost of contributions, there are other expenses to consider in running a retirement plan. Some plans entail less maintenance than others.

    High maintenance plans- Defined benefit plans are probably the most costly. They require annual actuarial fees to compute contributions. There are also premiums to the Pension Benefit Guaranty Corporation (PBGC) – a flat-rate charge of $19 per participant per plan year and, for underfunded single-employer plans, an additional variable-rate premium of $9 for every $1,000 (or fraction thereof) of unfunded vested benefits. There are also bond requirements.

    Profit-sharing, money purchase, 401(k) and defined benefit plans may entail legal fees to update plan documents to reflect law changes.

    All of these plans (other than one-person plans with assets below $100,000) require annual reporting to the Employee Benefits Security Administration (EBSA), so this can entail accounting fees for form preparation and submission.

    Low-maintenance plans- SEPs and SIMPLE-IRA plans are the easiest and least costly plans to maintain. Trustees provide prototype forms for plan adoption; the IRS has forms to use in fixing annual contributions. And there is no annual reporting required.

    It’s probable that no one plan will offer all the features you like. You’ll have to select a plan that best fits your requirements. Because the plan is essentially a long-term commitment on your part, it’s advisable to sit down with a retirement plan expert who can help assess your needs and give you a better idea of costs.

    For more details, see IRS Publication 3998, Choosing a Retirement Solution for Your Small Business, at www.irs.gov. You can also learn more about payroll deduction IRAs, SIMPLE plans and SEPs from Publication 4395, IRA Online Resource Guide, at www.irs.gov/retirement/article/0,,id=137310,00.html.

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