The Right Retirement Plan For You Or Your Employees?
Retirement is probably the number #1 reason that people invest and there are a variety of retirement plan choices. Whether you are an employer trying to provide the best benefit package options for your employees, or you want to make sure you have a good handle on the plan that is offered to you at work: Here is a brief look at the different plans and what they have to offer.
The Traditional 401(k). This plan is known as a defined contribution plan and is the most poplar plan in the market today for retirement savings. It basically replaced the defined benefit plans (pension plans) that were most prevalent for workers before 1984. The 401(k) plan is primarily funded with pre-tax dollars taken out of your paycheck (through payroll deductions). An employer can make tax-deductible employer contributions either as matching your level of contribution or (even more generously) make contributions to your account directly on your behalf.
The I.R.S. currently will allow you to contribute up to $16,500 a year in a Traditional 401(k); COLA adjustments may drive that limit higher in the future. The I.R.S. also allows catch-up contributions (additional contributions from those aged 50+), with a current annual limit of $5,500. In 2011, the total amount of contributions into a 401(k) by you and your employer can't exceed the lesser of 100% of your compensation or $49,000 ($54,500 if you are 50 or older).1,2
There are several variations on the traditional 401(k) theme:
The SIMPLE 401(k). Designed for small business owners who want to avoid the retirement plan administration or non-discrimination tests that are required with a Traditional 401(k), the SIMPLE 401(k) is available for businesses with less than 100 employees. Like a Safe Harbor 401(k) plan, the business owner must make fully vested contributions (a dollar-for-dollar match of up to 3% of an employee's income, or a non elective contribution of 2% of pay for each eligible employee.). For 2011, the maximum pretax employee contribution to a SIMPLE 401(k) is $11,500, and employees with a SIMPLE 401(k) can't have another retirement plan with that company.2
The Safe Harbor 401(k). As a result of the Small Business Job Protection Act of 1996, the Safe Harbor plan combines the best features of the traditional 401(k) and a SIMPLE IRA, making it very attractive to a business owner. With a Safe Harbor plan, a business owner-operator can avoid the big administrative expenses of a Traditional 401(k) and enjoy higher contribution limits than those available in the Simple 401(k). The Safe Harbor plan allows for employers to make matching or non-elective contributions to each employee. Employers typically match contributions dollar-for-dollar until the employee's contribution equals 3% of the employee's compensation. After that, an employer has the option to match employee contributions at 50 on the dollar until the employee's contribution equals 5% of the employee's compensation.2
The Profit Sharing Plan. Any size business can established this highly flexible plan which can be combined with other retirement plans. In fact, the company does not need profits in order to make contributions to a profit-sharing plan. Of course, having a profit would probably make it easier to actually contribute something. 3
Since there are not set amounts for contributions, it is the employer's discretion each year to determine the dollar amount that is contributed for each employee's separate account. If the employer can afford to make contributions to the plan, then they will need to have a set formula for determining how the contributions are divided.
One common method for determining each participant's allocation in a profit-sharing plan is the "comp-to comp" method. Under this method, the employer calculates the sum of all of its employees' compensation (the total "comp"). To determine each employee's allocation of the employer's contribution, you divide the employee's compensation (employee "comp") by the total comp. You then multiply each employee's fraction by the amount of the employer contribution. Using this method will get you each employee's share of the employer contribution. This plan is employer only contributions and for 2011, the maximum contribution is the lesser of 25% of compensation or $49,000.3
The Solo 401(k). Combine a profit-sharing plan with a Traditional 401(k), and you have the Solo 401(k) plan, a retirement savings vehicle designed for sole proprietors with no employees other than their spouses. These plans currently permit you to contribute up to $49,000 annually plus $5,500 in catch-up contributions for a total of $54,500 if you are 50 or older.4
The Roth 401(k). Imagine a Traditional 401(k) fused with a Roth IRA. Here's the big difference: you contribute after-tax income to a Roth 401(k), and when you reach age 59, your withdrawals will be tax-free (provided you've had your plan for more than five years). The annual contribution limits are the same as those for a Traditional 401(k) plan.5
You can roll Roth 401(k) assets into a Roth IRA when you retire - and you don't have to make mandatory withdrawals from a Roth IRA when you turn 70. With a standard 401(k), you have to roll over the assets to a traditional IRA and make the required withdrawals.5
The DB(k).The DB(k) is new version of a "old" defined benefit retirement plan mixed with some of the features of a 401(k). Many companies with fewer than 500 employees are beginning to take advantage of their benefits. They offer plan participants a retirement savings plan with the potential for a small income stream in the future, mimicking the pensions of years past. The pension income equals either a) 1% of final average pay times the number of years of service, or b) 20% of that worker's average salary during their five consecutive highest-earning years.6,7
And then there are SEP-IRA, SIMPLE IRA and Keogh plans...
The SEP-IRA. This employer-funded plan gives businesses a simplified plan to make employee retirement contributions (and optionally, their own). The employer contributions are 100% vested from the start, and the employer can supplement the SEP-IRA with another retirement plan. In 2011, an employer's annual contribution limit to a SEP-IRA can't exceed the lower of $49,000 or 25% of an employee's salary. A self-employed individual's personal contribution limit to a SEP-IRA depends on such factors as service, performance, and salary.4,8
The SIMPLE IRA. This popular option like a SIMPLE 401(k) - a small business retirement plan with mandatory employer and optional employee contributions and a $11,500 annual contribution limit. In this plan the one big difference for the business owner is, if the business is not doing well, the owner can temporarily reduce plan contributions. The employer contributions are still 100% vested from the beginning, and $2,500 catch-up contributions are currently allowed for employees 50 and older.9
The Keogh Plan.The Keogh is designed for small unincorporated businesses. There are defined benefit, money purchase and profit-sharing variations; the defined benefit variation is a qualified pension plan offering a fixed benefit amount. In 2011, the annual contribution limit for a profit-sharing Keogh is $49,000 (subject to limits outlined in IRC Section 415).10
Decisions, Decisions, Decisions? As an employer, you might not have realized you have such a diverse array of choices in retirement plans and as an employee, you might not have been fully utilizing the options you have available. This brief overview does not include "special executive compensation" plans that can be created to enhance the ability of business owners and highly compensated key employees to save for their retirement. Asking the right questions is the first step toward implementing the right plan for your future or your company. Now be sure to ask your accountant, qualified financial advisor or business retirement plan consultant about your options today!
Cita
The Traditional 401(k). This plan is known as a defined contribution plan and is the most poplar plan in the market today for retirement savings. It basically replaced the defined benefit plans (pension plans) that were most prevalent for workers before 1984. The 401(k) plan is primarily funded with pre-tax dollars taken out of your paycheck (through payroll deductions). An employer can make tax-deductible employer contributions either as matching your level of contribution or (even more generously) make contributions to your account directly on your behalf.
The I.R.S. currently will allow you to contribute up to $16,500 a year in a Traditional 401(k); COLA adjustments may drive that limit higher in the future. The I.R.S. also allows catch-up contributions (additional contributions from those aged 50+), with a current annual limit of $5,500. In 2011, the total amount of contributions into a 401(k) by you and your employer can't exceed the lesser of 100% of your compensation or $49,000 ($54,500 if you are 50 or older).1,2
There are several variations on the traditional 401(k) theme:
The SIMPLE 401(k). Designed for small business owners who want to avoid the retirement plan administration or non-discrimination tests that are required with a Traditional 401(k), the SIMPLE 401(k) is available for businesses with less than 100 employees. Like a Safe Harbor 401(k) plan, the business owner must make fully vested contributions (a dollar-for-dollar match of up to 3% of an employee's income, or a non elective contribution of 2% of pay for each eligible employee.). For 2011, the maximum pretax employee contribution to a SIMPLE 401(k) is $11,500, and employees with a SIMPLE 401(k) can't have another retirement plan with that company.2
The Safe Harbor 401(k). As a result of the Small Business Job Protection Act of 1996, the Safe Harbor plan combines the best features of the traditional 401(k) and a SIMPLE IRA, making it very attractive to a business owner. With a Safe Harbor plan, a business owner-operator can avoid the big administrative expenses of a Traditional 401(k) and enjoy higher contribution limits than those available in the Simple 401(k). The Safe Harbor plan allows for employers to make matching or non-elective contributions to each employee. Employers typically match contributions dollar-for-dollar until the employee's contribution equals 3% of the employee's compensation. After that, an employer has the option to match employee contributions at 50 on the dollar until the employee's contribution equals 5% of the employee's compensation.2
The Profit Sharing Plan. Any size business can established this highly flexible plan which can be combined with other retirement plans. In fact, the company does not need profits in order to make contributions to a profit-sharing plan. Of course, having a profit would probably make it easier to actually contribute something. 3
Since there are not set amounts for contributions, it is the employer's discretion each year to determine the dollar amount that is contributed for each employee's separate account. If the employer can afford to make contributions to the plan, then they will need to have a set formula for determining how the contributions are divided.
One common method for determining each participant's allocation in a profit-sharing plan is the "comp-to comp" method. Under this method, the employer calculates the sum of all of its employees' compensation (the total "comp"). To determine each employee's allocation of the employer's contribution, you divide the employee's compensation (employee "comp") by the total comp. You then multiply each employee's fraction by the amount of the employer contribution. Using this method will get you each employee's share of the employer contribution. This plan is employer only contributions and for 2011, the maximum contribution is the lesser of 25% of compensation or $49,000.3
The Solo 401(k). Combine a profit-sharing plan with a Traditional 401(k), and you have the Solo 401(k) plan, a retirement savings vehicle designed for sole proprietors with no employees other than their spouses. These plans currently permit you to contribute up to $49,000 annually plus $5,500 in catch-up contributions for a total of $54,500 if you are 50 or older.4
The Roth 401(k). Imagine a Traditional 401(k) fused with a Roth IRA. Here's the big difference: you contribute after-tax income to a Roth 401(k), and when you reach age 59, your withdrawals will be tax-free (provided you've had your plan for more than five years). The annual contribution limits are the same as those for a Traditional 401(k) plan.5
You can roll Roth 401(k) assets into a Roth IRA when you retire - and you don't have to make mandatory withdrawals from a Roth IRA when you turn 70. With a standard 401(k), you have to roll over the assets to a traditional IRA and make the required withdrawals.5
The DB(k).The DB(k) is new version of a "old" defined benefit retirement plan mixed with some of the features of a 401(k). Many companies with fewer than 500 employees are beginning to take advantage of their benefits. They offer plan participants a retirement savings plan with the potential for a small income stream in the future, mimicking the pensions of years past. The pension income equals either a) 1% of final average pay times the number of years of service, or b) 20% of that worker's average salary during their five consecutive highest-earning years.6,7
And then there are SEP-IRA, SIMPLE IRA and Keogh plans...
The SEP-IRA. This employer-funded plan gives businesses a simplified plan to make employee retirement contributions (and optionally, their own). The employer contributions are 100% vested from the start, and the employer can supplement the SEP-IRA with another retirement plan. In 2011, an employer's annual contribution limit to a SEP-IRA can't exceed the lower of $49,000 or 25% of an employee's salary. A self-employed individual's personal contribution limit to a SEP-IRA depends on such factors as service, performance, and salary.4,8
The SIMPLE IRA. This popular option like a SIMPLE 401(k) - a small business retirement plan with mandatory employer and optional employee contributions and a $11,500 annual contribution limit. In this plan the one big difference for the business owner is, if the business is not doing well, the owner can temporarily reduce plan contributions. The employer contributions are still 100% vested from the beginning, and $2,500 catch-up contributions are currently allowed for employees 50 and older.9
The Keogh Plan.The Keogh is designed for small unincorporated businesses. There are defined benefit, money purchase and profit-sharing variations; the defined benefit variation is a qualified pension plan offering a fixed benefit amount. In 2011, the annual contribution limit for a profit-sharing Keogh is $49,000 (subject to limits outlined in IRC Section 415).10
Decisions, Decisions, Decisions? As an employer, you might not have realized you have such a diverse array of choices in retirement plans and as an employee, you might not have been fully utilizing the options you have available. This brief overview does not include "special executive compensation" plans that can be created to enhance the ability of business owners and highly compensated key employees to save for their retirement. Asking the right questions is the first step toward implementing the right plan for your future or your company. Now be sure to ask your accountant, qualified financial advisor or business retirement plan consultant about your options today!
Cita