Employers and workers alike will benefit from a qualified retirement package, but the time and effort involved in choosing a package may seem overwhelming for a small business owner who is busy with daily operations. It doesn’t need to be. blogoye.org/financial-investments-that-can-be-considered-right-now/ has some nice tips on this.
There are two flavours of retirement plans: eligible and non-qualified. A eligible plan is attractive because it provides both the employees of the company and its owner with a mechanism for tax-deferred retirement savings, with permissible contributions in excess of those authorised for IRAs. A eligible package also gives an automatic deduction to the employer for the contributions made. It may motivate workers to increase the company’s income and to stay with the employer, depending on the programme. With optional features, plans can be personalised.
Non-qualified plans do not have to fulfil many of the conditions levied on qualified plans and, as a consequence, have a broader variety of features and provisions. However, with a non-qualified scheme, the employer does not get an automatic tax deduction in most cases. In order to delay the employee’s taxes before the money is eventually distributed, such plans would also prohibit “constructive reception” by the employee. Usually, this exposes the worker to credit risk if the company fails before paying out the deferred compensation. Non-qualified plans are often useful, but one of the qualified plan structures mentioned in this article would be preferred by most small businesses.
All of this can leave your head spinning, especially if your area of expertise isn’t personal finance. Think about having a savings package that fits your small company, such as purchasing a new vehicle, to simplify the exercise. As well as providing any special features you want, you should consider which retirement plan vehicle will suit the scale, needs and budget of your company. The more your retirement plan is “tricked out,” the more expensive it will be to create and sustain.
The bare-bones model that takes you from point A to point B is the SEP (Simplified Employee Pension) IRA. It is simple to implement, and custodians such as Schwab or T usually do. In order to start one, Rowe Price offers a simple type. As late as the employer’s income tax filing deadline, including extensions, a SEP may be created. The employer does not have any further filing provisions after the initial set-up.
The employer makes contributions to all qualifying workers with a SEP. An employee who is at least 21 years of age and has been employed by the employer for three of the last five years, with compensation of at least $550 during the year, is the popular threshold for eligibility. If the employer wishes, eligibility requirements may be less strict than this. Contributions are an equal percentage of the compensation of any employee. For 2013, the overall contribution is 25 percent of compensation, but no more than a total of $51,000 ($52,000 in 2014). (The same limitations on donations made to the SEP-IRAs of workers often apply to donations if you are self-employed. Special regulations, however, apply when the maximum deductible donation is calculated.) An employer does not have to make a contribution in a year where cash is minimal. SEP payments are due, including extensions, by the employer’s tax filing deadline.
For a single owner or a small company with a few workers, a SEP is a perfect option if the employer wishes to provide a retirement savings vehicle that allows greater tax deductible contributions than a typical IRA with minimal fuss and maximum flexibility.