You’ve done all the right things to create a successful business. You’ve created a niche for yourself, you’ve gained credibility in your community and you’ve seen your business flourish. Perhaps you even hired an associate or support staff. Now that you’ve built that business from the ground up, your concerns are how you can reduce your tax liability, reward the people that work with you and attract new employees. One of simplest ways to accomplish all of these goals is to have a retirement plan. Yet, even if you have a retirement plan, is it the most efficient plan for the way your company is structured? Most business owners are more concerned with dealing with their clients instead of running a business. Because of this, they find themselves with either no retirement plan or the plan they currently have fails to address their needs in a cost ineffective manner.
A retirement plan is much like insurance policy. Whereas the dynamics of the business, costs of a plan and benefits change, so should the retirement plan? For these reasons, a business owner should evaluate their needs for a retirement plan every few years and make sure its cost and its overall benefit is in line with the business owner. As a business matures or even contracts, the needs of the business owner also change. Therefore, one must look at the overall goals of your particular practice and then evaluate what options exist. All retirement plans are not the same. In fact, there is such a wide variety of retirement plans that learning more about your choices is a good idea. Here’s a brief look at a few of the more popular types of retirement plans and what they have to offer.
The SEP IRA
Typically this is an excellent plan for a self-employed individual or an employer with few employees who is interested in a low-cost solution that enables income deferral. The SEP plan allows the employer to defer up to 25% of compensation but no more than $49,000 (2009). The downfall for this plan is that the employer is also obligated to contribute the same percentage that they to their employees accounts as they would themselves.
Defined Benefit Plan, Traditional or Cash Balance Plan
These types of plans are employer-sponsored retirement plans with benefits determined by a formula that indicates the benefit an employee will receive upon retirement. Usually they are expressed either as a monthly annuity (Traditional Defined Benefit) or a hypothetical lump sum – Cash Balance, of course it is not all milk and honey and you should be wee informed about cash balance plan pros and cons. Firms that find themselves in a situation where there is a disparity in either age, compensation or both will find these retirement plans attractive. Whether or not your business has just began or you are 20 year veteran, retirement plans are one of the easiest ways you can defer income and reward employees at little expense to you and your company. Along the way, you’ve funded your retirement and if planned correctly, you’ve created a larger after tax take home pay for you and your family.