Retirement Planninmg for Small Business Owners

Having a retirement savings plan benefits your business and your retirement. Your contributions on behalf of plan participants, yourself and your spouse (if you are working together) may qualify for a tax deduction, which in turn saves your business from paying more taxes. All earnings on retirement savings and investments grow tax-deferred until withdrawn. As your business expands, a retirement savings plan at work will be a benefit that attracts and retains talented employees.

Choosing the right plan for your business requires considering various factors, such as your business income, future expansion plans, number of employees, etc. We at Wales Investments are able to assist you in deciding on a suitable plan based on your objectives. The following is a brief introduction to various plans available for small business owners. Please contact us for more details.

Simplified Employee Pension Plan (SEP IRA)

If your business employees less than 10 staff, SEP IRA is worth your consideration. It is inexpensive and easy to maintain. The main characteristics of a SEP are funding with tax-deductible employer contributions and covering all eligible employees. Employee contributions are not allowed. Another advantage about SEP is that your contributions can vary from year to year, depending on the profitability of the business.

	Employer	Employee
Eligibility	Any business owner or self-employed individual.	All employees who have worked for you for three of the past five years and who earned at least $500 from you last year.
Contribution Limits	If you are an employee of your own corporation: 25% of compensation up to $46,000. If you are self-employed: 20% of self-employment income up to $46,000.	Employees cannot contribute. But the employer must contribute to eligible employee accounts the same salary percentage applied to everyone.
Vesting	Immediate.	Immediate.
Pros	Contributions do not have to be made every year. Easy to set up and administer.	Vesting is immediate.
Cons	Must cover all qualifying employees and vesting is immediate.	Employees cannot contribute.

Savings Incentive Match Plan for Employees (SIMPLE IRA)

If employee contributions are important to you, SIMPLE IRAs are a good option. They allow employee contributions and mandate an employer match. But there is a lower contribution limit: $10,500; $13,000 if you are 50 or older (as of 12/31/08) plus an employer matching contribution (up to 3% of your salary). It also sets a higher eligibility for qualifying employees to those earning more than $5,000.

	Employer	Employee
Eligibility	Employers with 100 employees or less who do not maintain any other retirement plans.	All employees who have ever earned more than $5,000 in any two years prior and who will earn at least $5,000 this year.
Contribution Limits	Mandatory dollar-for-dollar employer match of up to 3% of salary (or as low as 1% for some years) or mandatory employer contribution equal to 2% of salary (limited to maximum contribution of $4,600) regardless of employee's contribution (if any).	$10,500 plus employer match up to 3% of salary. (Self-employed person can contribute $10,000 plus match to her own account.) Additional $2,500 if you are age 50 or older as of 12/31/08.
Vesting	Immediate.	Immediate.
Pros	Employees can make contributions.	Employees can make contributions.
Cons	Employer match is mandatory. Vesting is immediate.	Other plans might allow higher contribution limits than SIMPLE IRA.

Profit Sharing Plans

A profit sharing plan gives a slice of company's profits to employees; thus it has positive impact on employee's morale and productivity. Since company's profits vary from year to year, contributions to a profit sharing plan also change and can be reduced to zero if company's business situation does not allow it.

	Employer	Employee
Eligibility	Any business owner or self-employed individual.	Employees who worked at least 1,000 hours in past year, two years, if no vesting period.
Contribution Limits	25% of salary (20% of self-employment income) up to $46,000.	Employees cannot contribute.
Vesting	Determined by employer.	Determined by employer.
Pros	Contributions can vary from year to year.
Cons	Higher administration cost.	Employees cannot contribute. Vesting takes time.

401(k)

401(k) plans were once considered suitable for bigger companies only. But now the cost of maintaining one is lower that even a small company of 25 employees can find an affordable 401(k) plan. To encourage employee contributions, companies can give matching funds to those who contribute to their 401(k) accounts.

	Employer	Employee
Eligibility	Any business	Employees who worked at least 1,000 hours in the past year; two years, if no vesting period.
Contribution Limits	Combined employer and employee's contribution cannot exceed $46,000 ($51,000 if you are 50 or older).	$15,500 ($20,500 if you will be age 50 or older as of 12/31/08.)
Vesting	Determined by employer.
Pros	Both employer and employees can make contributions although "match" from employers is not required.	Employee can contribute and take advantage of the matching contributions from employer.
Cons	Administration can be expensive.	Employer contributions usually take years to earn (vest).

Defined Benefit Plan

Although pension-like retirement plans offered by employers have become less and less popular, defined-benefit plans are still a viable option if your situation calls for it. It is suitable for an older employer who has not built up a nest egg and is near retirement. A defined-benefit plan is a good opportunity to accelerate your savings in a shorter time. You can contribute as much as is needed to give you an annual retirement payout of $185,000 or 100% of the average of your three highest consecutive pay years. The calculation needs an actuarial expert and thus makes plans like this more expensive. In addition, it requires contributions every year. For younger employees, contributions to their accounts will be less because they have more years to accumulate an equal amount of benefit.

	Employer	Employee
Eligibility	Any business owner or self-employed individual.	Employees who worked at least 1,000 hours in the past year; two years, if no vesting period.
Contribution Limits	Contributions are based on actuarial assumption. Maximum annual retirement benefit is $185,000 or 100% of the participant's average compensation for his highest three consecutive earning years.	Employee cannot contribute
Vesting	Determined by employer.	Determined by employer.
Pros	Older employers looking to put away more money over shorter period of time.	You are guaranteed a set payout after retiring.
Cons	It can be expensive and inflexible.	No employee control over investment options. Vesting takes years in most plans.