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Cents and Sensibility Guy Steele |
Find the business
retirement plan
that’s best for youIF you run a small business, you've got no shortage of concerns: Cash flow, marketing, the ebb and flow of the economy, you name it. In fact, you have so many issues to ponder, you might find it hard to take the time to choose a retirement plan for your business.
And yet, it's worth the effort, because the right plan can offer the opportunity to make your life a lot easier in the days when you don't have so much to think about.
Fortunately, there's never been a better time for small-business owners to choose a good, cost-efficient retirement plan. In recent years, new tax laws have made it easier for you to pick a plan that can help you save for retirement and, if necessary, attract and retain quality employees.
The most common types of retirement plans offer tax-deferred growth of earnings, the ability to make tax-deductible contributions and a variety of investment options. Beyond sharing these traits, though, small-business retirement accounts differ in contribution limits and other factors. Let's look plan options for small business with and without employees.
Self-employed
OWNER-ONLY 401(k) >> When you establish an "owner-only 401(k)," you can put in up to 25 percent of your compensation in a profit-sharing plan, plus $12,000 (in 2003) in 401(k) contributions. If you're 50 or older, you can put an extra $2,000 into your 401(k). (You can't contribute more than $40,000 per year if you're under age 50 or $42,000 annually if you're 50 or older.) Furthermore, both the 401(k) and 50-and-over "catch-up" limits will be increasing over the next several years, so you'll be able to put away even more money for retirement. Plus, you can transfer most retirement plan assets, such as profit sharing and money-purchase plans, into your owner-only 401(k).SEP-IRA >> For 2003, you can put the lesser of $40,000 or 25 percent of your compensation into your SEP-IRA. Eligible compensation is capped at $200,000. You can set up a SEP-IRA for your business with a minimum of paperwork. And you won't have to file any annual reports on the plan, such as the Form 5500.
Employer
SIMPLE IRA >> As you can deduce from its name, a SIMPLE IRA is easy to set up and inexpensive to administer. In 2003, employees can contribute up to $8,000 to their SIMPLE IRA. Your business is generally required to match your employees' contributions up to 3 percent of their salary, unless you decide to put in 2 percent of each eligible employee's compensation. If you choose the matching option, you can reduce the match to between 1 percent and 3 percent in two of every five years.SAFE HARBOR 401(k) >> By following some specific guidelines, you can set up a Safe Harbor 401(k), a plan that offers the same features as a traditional 401(k), but without the burdensome nondiscrimination testing required to identify excessive contributions by highly compensated employees. (Employees' contribution limits are the same as those described in the "owner-only" 401(k).) The key benefit of the Safe Harbor 401(k) is that you, the business owner, can contribute up to the annual dollar amount (in 2003 that's $12,000, or $14,000 if 50 or older) regardless of how much your employees contribute.
Any of these plans can help you meet your long-term goals of saving for retirement outside of the value of your business. But to fully diversify your holdings and build even more resources, you also will need to save and invest outside of your retirement plan. So, meet with your investment representative and tax advisor to choose a plan that's right for you, but don't stop there. When it comes to funding your retirement, it's hard to save too much.
See the Columnists section for some past articles.
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, Hawaii, 96734, or call 254-0688
