Cents and Sensibility


Small business owners
can save for retirement

Considering all the time, effort and expense it takes to run a successful business, how can you assure that your retirement years really will be your golden years?

The answer may be simpler than you think. Thanks to business retirement plans, you may not need to sell your business to fund your retirement.

Many business retirement plans are easy to understand and require very little time to establish and maintain. You may establish and maintain these plans in addition to any Individual Retirement Account you have, but they may affect the deductibility of IRA contributions. If you employ family members, there is comfort in knowing you are helping them prepare for retirement as well.

Although the goal of a retirement plan is to enable you to be financially independent when you retire, it can also provide advantages before you retire. Specifically, you will receive tax deductions for contributions made on your behalf and on behalf of your employees. In addition, the contributions will grow tax deferred, which can have a dramatic impact on the dollars available at retirement.

The types of retirement plans vary widely. However, there are plans that most frequently fit the needs of small-business owners.


The simplest business retirement plan, a SEP-IRA, is basically a super IRA that allows contributions larger than the $2,000 annual contribution for an individual IRA. With a SEP-IRA, eligible contributions are the lesser of 15 percent of compensation or $35,000. SEP contributions reduce your taxable income, and the contributions made for employees are deducted on your business tax return. Also, SEP contributions are flexible, which means you don't have to contribute when profits are low.

Other restrictions, however, do apply. You must be willing to cover all employees over the age of 21, as well as those who have been in your employ three of the past five years. In addition, employees covered by an SEP are immediately vested. It is important to note that an SEP offers no loan provisions, and distributions have no special tax advantages.


A word about 401(k)s -- Many taxpayers saving for retirement have a great deal of interest in 401(k)s, another type of salary deferral plan. In most cases, 401(k)s are too expensive for the average small-business owner to administer. The increased costs for this plan are due to anti-discrimination testing and additional IRS filing requirements.

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:

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