Business owners: Don’t neglect your own retirement plan

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Consider managing your risk now by investing in a tax-advantaged retirement account. Employer-sponsored retirement plans offer a number of potential benefits, including current tax deductions for the business and tax-deferred growth and/or tax-free retirement income for its employees.

Below are a few options:

IRA-type plans
Unlike “qualified” plans that must comply with specific government regulations, IRAs are less complicated and typically less costly.

  • SEP IRA — allows you to set up an IRA for yourself and each of your eligible employees. Although you contribute the same percentage of pay for every employee, you’re not required to make contributions every year. For 2014, total contributions (both employer and employee) are limited to 25% of pay up to a maximum of $52,000 for each employee (including yourself).
  • SIMPLE IRA — allows employees to contribute up to $12,000 in 2014 on a pretax basis. Employees age 50 and older may contribute an additional $2,500. As the employer, you must either match your employees’ contributions dollar for dollar up to 3% of compensation, or make a fixed contribution of 2% of compensation for every eligible employee. (The 3% contribution can be reduced to 1% in any two of five years).

Qualified plans
Although these types of plans have more stringent regulatory requirements, they offer more control and flexibility. (Special rules may apply to self-employed individuals).

  • Profit-sharing plan — Typically only the business contributes to a profit-sharing plan. Contributions are discretionary (although they must be “substantial and recurring”) and are placed into separate accounts for each employee according to an established allocation formula. There’s no fixed amount requirement, and in years when profitability is particularly tight, you generally need not contribute at all.
  • 401(k) plan — allows employees to make both pre-and after-tax (Roth) contributions. Employee contributions cannot exceed $17,500 in 2014 ($23,000 for those 50 and older) or 100% of compensation, and employers can choose to match a portion of employee contributions. These plans must pass a test to ensure they are nondiscriminatory; however, employers can avoid the testing requirements by adopting a “safe harbor” provision that requires a set matching contribution based on one of two formulas. Another way to avoid testing is by adopting a SIMPLE 401(k) plan.
  • Defined benefit (DB) plan — promise to pay employees a set level of benefits during retirement, based on a formula typically expressed as a percentage of income. DB plans generally require an actuary’s expertise.

Total contributions to profit sharing and 401(k) plans cannot exceed $52,000 or 100% of compensation in 2014. With both plans (except safe harbor 401(k) plans), you can impose a vesting schedule that permits your employees to become entitled to employer contributions.

For the self-employed
Sole entrepreneurs may consider an individual or “solo” 401(k) plan. These types of plans are very similar to a standard 401(k) plan, but because they apply only to the business owner and his or her spouse, the regulatory requirements are not as stringent. They can also have a profit-sharing feature, which can help you maximize your tax-advantaged savings potential.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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