Qualified Retirement Plans for Small Businesses
For the small-business owner, attracting and retaining valuable employees can be a daunting challenge. One way to make working for your business more attractive to current and potential employees alike is to implement a qualified retirement plan for you and your employees. Besides greater appeal to your workers, qualified plans can also provide you with numerous tax advantages, including:
Contributions for all participants are 100% tax-deductible to the business up to certain limits.
Annual contributions by the business are not considered taxable income to the plan participants.
Capital gains and interest earned are deferred from taxation during the accumulation years. Income taxes are payable upon withdrawal.
At retirement, favorable tax treatments may apply such as spreading payments over the participant’s lifetime and special averaging formulas.
In addition to the obvious tax and employee hiring/retention advantages, there are many other, equally important, reasons to implement a qualified plan. For example, plan assets are creditor-proof. The assets of the plan are not subject to malpractice lawsuits or bankruptcy rulings.
These and other advantages combine to help improve morale as the participants realize that their company provides the mechanism to help secure their retirement.
Types of Plans
The two most common types of qualified retirement plans are pension and profit-sharing plans. A business can also sponsor an IRA or SEP (simplified employee pension plan).
Pension Plans. There are three major types of pension plans — defined benefit, money purchase, and target benefit.
- A defined benefit plan is one where the retirement benefit is determined by a plan formula – usually based on years of service.
- A money purchase pension plan is one where the plan formula specifies the percentage of each participant’s compensation that will be contributed each year.
- A target benefit plan is a hybrid. It starts out as a defined benefit plan, which determines the benefit. Once the benefit is calculated, the plan converts to a defined contribution or money purchase plan.
Profit-Sharing Plans. The most popular type of profit-sharing plans is 401(k) plans. Elective deferrals to these plans are limited to $15,000 for the year 2006 ($20,000 for people 50 years of age and older, including catch-up provisions). Annual contributions to a profit-sharing plan are generally not required; instead, they can be discretionary each year.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable – we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.