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Business Tip of the Month

Business Tip
of the Month
For the month of January 2006


Does your business have a retirement plan?

If you believe retirement plans are a luxury reserved for big business, think again. Small businesses and the self-employed can choose from a variety of plans specially designed to keep costs low and administration relatively simple.

SEP-IRA Plans
Perhaps the easiest plan to set up is a simplified employee pension plan (SEP). With a SEP, you make retirement plan contributions for your employees. The contributions are a percentage of their earnings, generally up to 25 percent, subject to dollar limits. The contributions you make go into individual retirement accounts set up for each employee. Employees manage the investments in their accounts, just like a traditional IRA. You don’t have to contribute every year, but if you do, you can’t discriminate among employees.

You can set up a SEP plan yourself using standard IRS forms. In fact, you have until the due date of your tax return to set up a plan for the previous tax year.

SIMPLE Plans
SIMPLE plans allow your employees to defer part of their salary into their retirement accounts. You, as employer, can either match those contributions up to certain limits, or you can make nonelective contributions to each eligible employee.

Generally, you can set up a SIMPLE plan if you have 100 or fewer employees, subject to some additional restrictions. The plans come in two varieties – SIMPLE IRAs and SIMPLE 401(k)s. Generally, they’re slightly more complex than SEPs to set up and administer.

Qualified Plans
Qualified plans come in many flavors. Two of the most common are the profit sharing plan and the money purchase plan. The first lets you share part of your profits with employees, according to a set formula. With a money purchase plan, you make fixed pension contributions regardless of profits. Qualified plans for the self-employed are also called Keogh plans. Generally, qualified plans require a trustee and are more complex and costly to administer.

Solo 401(k) Plans
If you’re self-employed, check out a solo 401(k) plan. You might find these offer the best opportunity to shelter income and save for retirement. The plans, offered by major brokerages, are relatively inexpensive and easy to administer.

For more information and guidance in selecting a retirement plan for your business, give us a call.

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