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Retirement Plans for Small Business and the Self-Employed

July 10, 2013

Here are your basic retirement plan options — SEP IRAs, SIMPLE IRAs, profit sharing plans, and 401(k)s. 

All of these plans offer you not only the personal benefits of saving for retirement, but business advantages too. Today, we’ll review each of these plans in greater detail. But for more information, you can review IRS Publication 560 on the IRS Web site at www.irs.gov

 

SEP IRASimplified Employee Pension

 • Easy to set up and administer.

• No annual tax reporting requirements.

• Appropriate for small businesses with few employees or sole proprietors.

• Participants must begin taking distributions by April 1 following the year they reach age 70½.

• Certain restrictions may apply to employers that have ever had a defined benefit plan or currently have a qualified retirement plan.

• Only the employer makes contributions.

• Contributions are tax deductible.

• Contributions are flexible; annual contributions are discretionary.

• The plan must allocate contributions to employees using a uniform formula that passes nondiscrimination testing standards, such as a pro rata formula, in which you give the same percentage to each eligible employee.

• Employees are vested immediately.

• Contributions of up to 25% of compensation or $50,000, whichever is less.

• For self-employed individuals, the limit is 20% of compensation.

• Each employee sets up his/her own SEP-IRA and decides how the money is invested.

 SIMPLE IRA

 • Easy to set up and administer.

• No annual tax reporting requirements.

• Appropriate for businesses with 100 or fewer employees.

• Participants must begin taking distributions by April 1 following the year they reach age 70½.

• Certain restrictions may apply to employers that have ever had a defined benefit plan or currently have a qualified retirement plan.

• Contributions are made primarily by employees.

• Employer contributions are tax deductible.

• There are two funding methods:

 

  1. Employees may contribute up to $11,500 in 2012 through salary deferral. Employers match contributions up to 3% of each individual’s annual compensation. Employers contribute only if employees contribute for themselves.

 

  1.  Employers make non-elective contributions of 2% (up to $5,000 based on a maximum employee compensation of $250,000 for plan year 2012), regardless of whether employees contribute for   themselves.

 

• Employees are vested immediately.

• Employees must earn at least $5,000 per year to be eligible.

• Can exclude union employees and nonresident aliens.

• Plans must be set up by October 1 to contribute for the current year.

• Each employee sets up his/her own SIMPLE IRA and decides how the money is invested.

 401(k)

 • Generally more appropriate for companies with 30 or more employees.

• Employees may contribute up to $17,000 in 2012 with an additional “catchup” contribution of $5,500 for employees age 50 or older.

• Employers can, but are not required to, match contributions. Total contributions are limited to $50,000 or 100% of compensation annually.

• All employees must be allowed to participate in match program (if you choose to have one).

• You may vest employees over time in employer contributions.

• Employer contributions are tax deductible, up to a maximum of 25% of employee compensation.

• Subject to nondiscrimination testing and other compliance and filing restrictions, yet recent tax legislation (contained in the Pension Protection

Act) aims to loosen restrictions and broaden the appeal of 401(k)s with the small business community.

• Owners of 5% or more of the company must begin taking distributions by April 1 following the year they reach 70½, while other employees can wait until they retire.

• Plan allows for loans (except for 5% owners).

Profit Sharing Plan 

• Contributions are discretionary. The employer may contribute for himself and/or for employees.

• Flexible contribution practices; may vary the amount and frequency of contributions as long as the same formula is followed for each participant.

• For 2012, employers may contribute up to the lesser of 100% of compensation or $50,000 to each employee’s account.

• Employees who have worked at least 1,000 hours in the past year are eligible to participate.

• You may vest employees over time.

• You’ll have to set up a profit sharing plan by the end of your company’s tax year (generally December 31), but you can contribute to it up until your company’s tax filing date.

• Administering a profit sharing plan typically requires the assistance of a professional.

 

Alan Sweeten, CFP ®
alan@sweetenwm.com/ Cell (760) 460-6509 / Phone (800) 841-2796

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