Retirement Plans for Your Small Business

Retirement Plans for Your Small Business

A retirement plan can be a critical part of a competitive benefits package. Although small business owners can sponsor a qualified retirement plan like a 401(k) or profit-sharing plan, these plans can be expensive to maintain and difficult to administer. Luckily, there are a number of simpler alternatives.

SIMPLE IRA plans

This savings option is for employers with 100 or fewer employees who earn $5,000 or more. A SIMPLE IRA plan lets your eligible employees contribute a percentage of their salary on a pretax basis, up to $10,000 in 2006 ($12,500 for employees age 50 and older). You either match each employee’s contributions dollar for dollar–up to 3% of the employee’s compensation–or make a fixed contribution of 2% of compensation for all eligible employees. All contributions to the plan are fully vested (that is, immediately owned by your employees), and your contributions are fully deductible.

SIMPLE IRA plans are easy to set up, easy to administer, and inexpensive to maintain. You fill out a short IRS form to establish the plan, and ensure that SIMPLE IRA accounts (to hold plan contributions) are set up for each employee. You can let each employee set up a SIMPLE IRA account at a financial institution of his or her choosing, or you can select the financial institution that will serve as trustee and initially hold all plan contributions.

Simplified employee pension (SEP) plans

A SEP plan allows small business owners to set up traditional IRAs, called SEP-IRAs, for themselves and each employee. You must generally contribute a uniform percentage of pay, up to 25%, for each eligible employee (up to $44,000 in 2006), but you don’t have to make contributions every year. Your employees don’t directly contribute to the SEP plan, although they can make their regular annual IRA contribution to their SEP-IRA if they choose. As with SIMPLE IRAs, all contributions to the plan vest immediately, and your contributions are fully deductible.

Most employers, regardless of size, can establish a SEP plan. SEP plans have low start-up and operating costs, and can be established using a two-page IRS form.

But don’t rule out a 401(k) plan …

No employees? Then there is one qualified plan you should consider–the individual 401(k) plan (also known as a solo 401(k) plan).

An individual 401(k) plan is a regular 401(k) plan combined with a profit-sharing plan. You can elect to defer up to $15,000 of your compensation to the plan for 2006 ($20,000 if you’re age 50 or older), just as you could with any 401(k) plan. In addition, as with a traditional profit-sharing plan, your business can make a maximum tax-deductible contribution to the plan of up to 25% of your compensation. Total contributions to your account can’t exceed $44,000 (or, if less, 100% of your compensation). If you’re self-employed, compensation is your earned income from your business.

Since an individual 401(k) plan can cover only the business owner and his or her spouse, it isn’t subject to the often burdensome and complicated administrative rules and discrimination testing that are generally required for regular 401(k) and profit-sharing plans.

A financial professional can help you select the plan that best fits your small business.