Cents and Sensibility
Cents and Sensibility
Question: "I'm a small- business owner and have been considering setting up a retire ment plan. I'd like one that's low-cost with minimum of administration. What are my choices?" A simple plan may
be the bestAnswer: You may want to take a look at a SIMPLE IRA (Savings Incentive Match Plan for Employees). This plan is available for any type of business with 100 or fewer eligible employees -- those who earned at least $5,000 in compensation for the previous year.
A SIMPLE IRA can truly be a "win-win" situation for you and your employees. Here are some of the key advantages:
>> Tax benefits: You and your eligible employees can defer up to $6,500 of salary per year. All contributions are tax deductible and earnings grow tax deferred until withdrawal.
>> Ease of administration: A SIMPLE IRA is one of the most inexpensive and easiest retirement plans to administer and maintain. You will have virtually no setup costs, no administrative fees and no discrimi- nation tests.
>> Funding flexibility: You are generally required to match your employees' elective contributions on a dollar-for-dollar basis, up to 3 percent of their compensation. However, you can make a lower matching contribution (not less than 1 percent) for up to two of every five years. Also, instead of making a match, you can contribute 2 percent of each eligible employee's compensation, up to the indexed limit of $170,000.
>> Range of investment options: You can fund a SIMPLE IRA with almost any investment vehicle available.
>> Contributions to other IRAs allowed: If you set up a SIMPLE IRA, you cannot have another tax-qualified plan for your business. However, you and your employees can still contribute up to $2000 a year to a traditional or Roth IRA. Although the traditional IRA contributions may not be tax deductible, they will still grow on a tax-deferred basis. (Roth IRA contributions are not tax deductible, but earnings grow tax-free, provided you meet certain conditions.)
Although a SIMPLE IRA offers many benefits, make sure your employees understand that this plan is intended for retirement. Penalties can be incurred for early withdrawal.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com