Which Retirement Plan Is Right for Your Business?
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
If you own a small business, there are many retirement plan alternatives available to help you and your eligible employees with retirement planning. For most closely-held business owners, a simplified employee pension individual retirement account (SEP IRA) was once the most cost-effective choice. Then the savings incentive match plan for employees (SIMPLE IRA) became a viable alternative. Today you may find that a defined-benefit or 401(k) plan best suits your needs. To make an informed decision on which plan is right for your business, review the differences carefully before you choose.
Simplified Employee Pension Individual Retirement Account (SEP IRA). This plan is flexible, easy to set up and has low administrative costs. An employer signs a plan adoption agreement and IRAs are set up for each eligible employee. When choosing this plan, keep in mind that although it does not allow employees to save through payroll deductions, contributions are immediately 100% vested.
The maximum an employer can contribute each year is 25% of an employee’s eligible compensation, up to a maximum of $245,000 for 2010. However, the contribution for any individual cannot exceed $49,000. Employer contributions are typically discretionary and may vary from year to year. With this plan, the same formula must be used to calculate the contribution amount for all eligible employees, including any owners. Eligible employees include those who are age 21 and older and those employed (both part time and full time) for three of the last five years.
Savings Incentive Match Plan for Employees (SIMPLE). If you want a plan that encourages employees to save for retirement, a SIMPLE IRA might be appropriate for you. In order to select this plan, you must have 100 or fewer eligible employees who earned $5,000 or more in compensation in the preceding year and have no other employer-sponsored retirement plans to which contributions were made or accrued during that calendar year. There are no annual IRS fillings or complex paperwork, and employer contributions are tax deductible for your business. The plan encourages employees to save for retirement through payroll deductions; contributions are immediately 100% vested.
The maximum salary deferral limit to a SIMPLE IRA plan for 2010 cannot exceed $11,500. If an employee is age 50 or older before December 31, then an additional catch-up contribution of $2,500 is permitted. Each year the employer must decide to do either a matching contribution (the lesser of the employee’s salary deferral or 3% of the employee’s compensation) or non-matching contribution of 2% of an employee’s compensation (limited to $245,000 for 2010). All participants in the plan must be notified of the employer’s decision.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)