Saving for the Golden Years
Which retirement plan is right for you and your business?

By Michael Ryan

If you’re a small business owner, you’ve invested a lot of time, effort and money into building your company. While owning a business can be rewarding, it does present a variety of unique financial and investment challenges, such as protecting your assets and reducing tax liability. To address these and other issues, you may want to consider an employer-sponsored retirement plan, which can offer significant advantages to you and your employees, including tax benefits.

A retirement plan not only gives your business the competitive edge in attracting and retaining quality employees, it also offers the ability to accumulate retirement funds tax-deferred, which means you don’t have to pay taxes on the money until you withdraw the funds. Keep in mind that taxes will be due upon withdrawal, and any withdrawals before age 59 ½ may be subject to a 10 percent IRS penalty.
    
Salary Deferred vs. Employer Funded
Employer retirement plans are categorized as either salary deferral plans or employer-funded plans.

Salary deferral plans let participants contribute a portion of their paycheck directly into the retirement plan. Depending on the type of plan, an employer can also make additional contributions.

Employer-funded plans are just that — the contributions to the plan come directly from the business and the employees do not make their own contributions.
    
Salary Deferred Plans
Let’s take a look at some of the salary-deferral plan options:

SIMPLE-IRAs. This type of plan allows employees to make pretax salary deferrals into the plan. In addition, the employer makes a required contribution, providing a tax deduction for the business. This plan is suitable for sole proprietorships, partnerships and corporations with less than 100 employees who have each earned at least $5,000 in compensation for the prior year. Nonprofit organizations, including government entities, may also have these plans.

Owner-only 401(k). An owner-only 401(k) plan is a retirement plan for businesses with no employees other than the owners and their spouses — including self-employed individuals, corporations and partnerships — who want to enhance their pretax retirement contributions. This plan allows the participant to make tax-deductible salary deferral contributions, in addition to an employer tax-deductible contribution. All earnings accumulate tax-deferred. In addition to an owner-only 401(k), there are other types of 401(k)s available, such as traditional and safe harbor plans.
    
Employer Funded Plans
In addition to salary deferral plans, there are several types of employer-funded plans that you may want to consider for your business:

SEPs. –These plans are available to business owners and consist of a collection of IRAs. This cost-effective plan provides tax deductions for the business and requires no annual IRS filings. These plans are suitable for any type of business, including sole proprietorships, partnerships and corporations. With a SEP, only the company contributes to the plan, not the employee.

Profit sharing plans. – A profit sharing plan is a defined contribution plan, which means the amount contributed to the plan is limited, but the amount paid to the employee at retirement is discretionary. The amount paid to the employee at retirement will depend on plan contributions and on the return earned by the investments in the plan. Contrary to what the name may imply, contributions to a profit sharing plan are not necessarily based on the profitability of the company, but on the amount of each participant’s compensation and how much the employer chooses to contribute to the plan. Profit sharing plans allow the employer to make tax-deductible contributions. The employee does not contribute to this type of plan. Any type of business, including sole proprietorships and partnerships can set up this plan.

As you can see, there are several options available to you and your business. Your financial consultant can help you select the most appropriate plan for your goals and your employees’ needs. If you already have a retirement plan, you should review it to ensure that it meets your business and your employees’ needs.

Michael K. Ryan is a financial consultant with A.G. Edwards & Sons Inc. He can be reached at (816) 931-2330 or . Visit his Web site at www.agedwards.com/fc/michael.ryan. This article was provided by A.G. Edwards & Sons Inc., Member SIPC.