A Retirement Plan Suitable For Business, Personal Needs

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BERLIN – Business owners work hard to manage their company – overseeing operations, cultivating sales and setting long-term strategies. A recent survey by the New York Enterprise Report found that one-third of business owners work more than 50 hours per week, and 25 percent log more than 60 hours a week on the job. In addition, 70 percent of those surveyed reported that they regularly work weekends. 

With these hours, it’s no surprise that business owners devote little or no time to planning for their own retirement. Last year, 47 percent of small business owners surveyed by Harris Interactive said they were unsure how they would manage their own retirement. In addition, more than 60 percent of those surveyed said they did not offer any retirement plan to their employees. Not surprisingly, sole proprietors were the least prepared. Only 6 percent of those surveyed who work alone have a 401(k) plan.

As a business owner, preparing for retirement might be the last thing on your mind. Whether or not you have started saving, it’s never too late to work with a Financial Advisor to get your business’ retirement plan in line with your own personal retirement goals.

The benefits of establishing a retirement plan generally include helping to build a secure future, getting a business tax deduction and attracting and retaining employees. As a business owner, you have a variety of choices in plan types, allowing you to find a solution that fits both your business and personal needs.

When selecting a retirement plan you should consider the size of your company, your ability to make annual contributions, how much you need to save, and whether or not you want a plan that allows your employees to contribute to their retirement savings. Answering these questions will help you find the plan that’s right for your particular situation.

If your goal is to make the maximum tax-advantaged retirement contribution, or accumulate substantial assets in a relatively short period of time, defined benefit plans are worth examining. Because they provide each employee with a specific benefit amount at retirement, they are suitable for businesses that have significant, stable incomes.  As an employer, however, remember that you must commit to making regular, fixed contributions through good years and bad.

For companies with varying profits, contribution flexibility is key and can be achieved with profit-sharing plans. These are defined contribution plans that allow employees to participate in the employer’s profits through a predetermined formula and permit more discretion with contributions. This allows the owner to reduce contributions in lean years and to step them up when things are flush. Profit-sharing plan contributions can also be weighted by employees’ ages, or by status in the company, such as a “key” or “non-key” employee. These age weighted and new comparability plans allow a greater percentage of the contributions to go to a certain group of employees as long as a certain minimum funding amount has been met for all other employees.

If your goal is to have a plan that’s both cost-effective and very easy to administer, consider a SEP IRA. This can be established by any business with one or more employees. Under a SEP, the employer makes direct contributions to individual retirement accounts on behalf of all employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for significant annual contributions. You can stash away up to 25 percent of your own or each employee’s pay, or $45,000, whichever is less. One key benefit of the SEP IRA is that all employer contributions are discretionary so you are not locked into a set annual contribution.

If you want a plan that offers salary deferral, 401(k) plans are beneficial because they shift some benefit costs to employees, and also help attract and retain employees. For a sole proprietor, the “owner-only” 401(k) may be a good choice to defer income into a retirement plan. They do, however, require more administration and annual reporting than other types of salary deferral plans.

If costs and ease of plan management are primary considerations, and your company employs fewer than 100 workers, a SIMPLE IRA may be a good option. A SIMPLE IRA allows you and your employees to contribute up to $10,500 annually and typically has low administrative costs. SIMPLE IRAs are also salary deferral plans that include an employer match, so they are ideally suited as a start-up retirement plan for employers who can afford matching contributions and do not want to be burdened with annual reporting requirements.

For business owners who want their employees to contribute to their own retirement, look to offer a plan that features the salary deferral option such as the 401(k), or a SIMPLE IRA. The 401(k) offers higher contribution limits but more complex administrative duties while the SIMPLE plan has no reporting requirement but lower contribution limits. If you want a plan that allows you to make contributions on behalf of your employees, you can offer a Profit Sharing, SEP or a Defined Benefit Plan. Ultimately it’s important to remember that your company’s retirement plan should benefit not only your employees but you as well.

(The writer is a Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-9084.)

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