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Reviewing Your
Company's Retirement Plan Options
Small businesses,
and their owners, have many retirement plan options. Choosing the right
plan, or combination of plans, can be helpful as part of running the business
and helpful to the owner for his or her retirement planning. Some of the
rules can get complex and you should consult with a retirement plan professional
as part of the decision making process. This article describes some of
the options and can help make the discussions with the professional more
effective.
Why have a plan?
For the owner, a qualified retirement plan can be an advantageous way
to accumulate wealth. Contributions to the plan can be tax-deductible,
earnings within the plan are tax-deferred and there can be flexible ways
to take distributions from the plan.
For the business,
providing a retirement plan can be a part of the total employee compensation
package. The right plan can help attract, retain and motivate your employees.
How much does it
have to cost?
Your cost for a retirement plan will take two forms - company contributions
to the plan on behalf of employees and yourself and the cost of establishing
and administering the plan. The chart below describes some of the funding
features of different types of plans. Choosing a plan that allows for
employee deferrals without requiring significant company contributions
may be the option that provides the best of two worlds - permitting the
accumulation of larger amounts of money and keeping the company cost low.
The administrative
costs of plans vary. Some plans are as simple as employees having IRA
accounts to receive contributions, while others require annual IRS filings
and audits. Be sure to discuss administrative costs with your service
provider and investigate what provider can provide the services you need
at the lowest cost.
How much responsibility
do you as the manager want?
Once money is contributed to a plan it must be managed and someone must
make the investment decisions. This may mean the trustee of the plan must
make investment decisions (or choose investment managers) or having a
plan that enables each participant to manage their own funds. More and
more plans are going this self-directed route.
Brief summary of
plan types
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Features
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SEP-IRA
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KEOGH
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SIMPLE-IRA
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401(k)
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Eligibility
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Self
employed individuals, business owners, those with self-employment
income
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Self
employed individuals, business owners, those with self-employment
income
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Businesses
with 100 or less employees not offering other retirement plan
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Any
public or private company. Usually
for companies with more than 25 employees
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Advantage
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Easy
to set up and maintain
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Highest
contribution limits
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Salary
reduction with lower administration
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More
features like vesting and loan provisions
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Contribution
source(s)
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Employer
only
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Usually,
employer only
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Employee
wage deferral and employer contributions
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Mostly,
employee wage deferral and optional company contributions
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Annual
contribution limits
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Up
to 25% of compensation, with maximum of $55,000 for 2018.
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Up
to 25% of compensation, with maximum of $55,000 for 2018.
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Employee: Up
to 100% of wages, $12,500 and up to $15,500 if age 50 or over for
2018.
Employer: EITHER,
match employee contributions up to 3% of wages (maximum of $12,500
for 2018); OR, 2% of employee's wages to $5,500 for 2018.
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Employee: Could
be up to 25% of wages up to $18,500 and up to $24,500 if age 50
or over for 2018.
Employer: Up
to 25% of wages, up to maximum of $55,000 and up to $61,000 if age
50 or over for 2018.
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Vesting
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Immediate
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Vesting
schedules are possible
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Employer
and employee amounts are immediately vested
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Employee
amounts are vested immediately. Employer
amounts can be subject to vesting schedules
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Administrative
Issues
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No
employer filings required
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Form
5500
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No
employer filings required
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Form
5500 and special discrimination testing required
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Summary
The right retirement plan can serve many purposes. Be sure to investigate
all the possibilities to make sure your plan accomplishes what you want.
The services of a qualified retirement plan specialist can be very valuable
in reviewing your options.
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