Retirement Plans
Retirement plans are a big part of the benefits packages which large employers use to attract potential employees. Employees like the ability to set aside tax deferred funds for retirement as well as lower their taxable income in the present.
You don’t need to be a Fortune 500 company to take advantage of retirement plans for yourself or your employees.
The traditional retirement plan for the self-employed is the Keogh Plan. A Keogh allows you to set aside 1 to 15% of your earnings, tax deferred, for retirement. Contributions to a Keogh are also tax deductible.
Since 2002, sole proprietors have been able to set up a Self Employed (or Solo) 401K. The advantages of a Solo 401K are that it has a higher contribution rate than a Keogh and are cheaper and easier to administer.
Contributions for 2006 are up to 100% of your first $15,000 of income and up to 25% of your income after that. You may also take a loan from your Solo 401K and make catch up contributions if you are over 50, unlike with a Keogh Plan.
Any company, regardless of the business structure or size can establish a Simplified Employee Pension Plan (SEP). Even if you are the only employee of your corporation, you are eligible to have a pension plan!Â
In basic terms, an SEP is an IRA account, which an eligible employee can contribute up to 25% of their compensation to the plan. An eligible employee is defined as at least 21 years old and earning a minimum of $450/year from the company.
If your company elects to make contributions to the SEP accounts, they must be uniform for all employees, but you can take a tax deduction for those contributions. SEP IRAs are governed by the rules of traditional IRAs and can be converted to a traditional IRA at any time.
A SIMPLE (Savings Incentive Match Plan for Employees) is another type of tax deferred retirement trust. If your corporation employs between 1 and 100 people who have each earned a minimum of $5,000, you’re eligible to set up a SIMPLE.
An employee can elect to contribute any percentage of their compensation, up to $6,000 a year to a SIMPLE. Under the guidelines of a SIMPLE, the corporation is required to make contributions to the employee’s account.
There are several different contribution formulas employers may choose from and they all add up to tax deductions for the company.
An interesting thing to consider with retirement plans such as SEPs and SIMPLEs are the tax savings if your corporation employs members of your family. You can potentially reap double rewards if you’re making tax-deductible company matches and your dependent family members are maximizing on the ability to tax defer as much of their income as possible.