"Small business" doesn't mean "small retirement." Indeed, small-business owners have plenty of options for retirement savings -- for themselves and their employees. Don't be fooled by their names, though. "Simple" or "simplified" plans often fail to live up to their names.
Keep in mind that these plans are the fruits of government wrangling. In other words, retirement plans are far from simple.
Then again, the benefits are well worth the hassle. The marquee attraction of a retirement account is tax savings, which may mean taking a deduction for contributions or deferring taxes on gains. Over the years, the tax savings can make for a much larger nest egg.
So, then, what can a small-business owner do? Let's take a look at the options.
The common perception is that 401(k)s are only for mega-companies like IBM
A key benefit of the 401(k) is that it provides the highest contribution limits. The employer can contribute up to 25% of compensation or $42,000, whichever is less. An employee can contribute 100% of compensation or $14,000 (the limit goes to $18,000 if the employee is 50 or older). Participants in a 401(k) plan can also borrow against the value of the account.
The costs of setting up a 401(k) are tax-deductible for the employer. Even more enticing is a $500 tax credit for small businesses. On the downside, though, the administrative paperwork and regulations can be complicated and time-consuming.
As the name implies, this type of plan is geared toward small businesses. The contribution limits are lower -- the lesser of $10,000 or 100% of compensation -- but an employee is allowed to take loans against the Simple 401(k) account.
In a profit-sharing scenario, the contribution amounts are based on the annual profits of the overall business. Each year, an employer can keep or change the percentage that goes into a profit-sharing plan.
The employer can make his or her own contributions, as well as contributions for employees. Employees, on the other hand, cannot contribute their own compensation. The limits of the contributions are 25% of annual compensation or $42,000, whichever is less.
According to Wendy Brown, senior financial advisor at Merrill Lynch
The SEP-IRA (Simplified Employee Pension) is one of the more inexpensive plans to establish. Like a profit-sharing plan, only the employer can make contributions to the SEP-IRA for him or herself and on the behalf of the employees. The contribution limit is 25% of compensation or $42,000, whichever is less.
Actually, every year, the employer is required to make contributions. Also, there are no loans allowed against the value of a SEP-IRA.
The Simple IRA is also a relatively inexpensive plan to establish. The employer can contribute for himself, as well as on behalf of the employees. The limit on contributions is $10,000 or 100% of compensation, whichever is less. No loans are allowed against the value of the Simple IRA account.
As indicated above, even the so-called simple plans are far from simple. Each retirement option involves complex regulations and requirements. In other words, seeking qualified advice is highly recommended.
Further, there are online systems that can help with the process. Take theonline401k.com, for instance. It walks users through the entire process of setting up and maintaining a retirement plan. Its other features include online plan design, automatic email reminders, on-demand 401(k) statements, and an online compliance calendar.
"As much as possible, we try to make it easy for our busy clients to manage the plan. On average, they only need to devote three hours a month on actively managing their company's plan," said Chad Parks, the CEO of The Online 401(k).
That's not a bad thing. After all, it means that a small-business owner can focus on his or her own business, not the nuances and complexities of a retirement plan.
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