If you’re in the electrical industry, you’re always thinking about today. How can you get more projects today? Is your cash flow sufficient for today? Is my bid competitive? What are your competitors doing today? However, you can’t forget about tomorrow. Specifically, you need to make sure you’re building sufficient financial resources to enjoy a comfortable retirement. To help you do just that, you need the right small-business retirement plan.
And since it’s the beginning of a new year, it’s a perfect time to set up the right plan for your needs. You have several attractive options, all of which offer some key benefits, including tax-deferred earnings, the ability to make pretax contributions and a variety of investment choices.
Let’s take a quick look at some of the most popular retirement plans for small businesses.
Small Business with no employees
If you have no employees, or your spouse is your only employee, you may want to consider one of these plans:
- SEP IRA. With a SEP IRA, you can contribute up to 25 percent of your compensation into the plan, up to a maximum of $44,000 in 2006.
- Owner-Only 401(k). If you have an owner-only 401(k), you can put in up to 25 percent of your compensation plus $15,000 (in 2006). If you’re 50 or older, you can add an additional $5,000 in “catch-up” contributions. (However, you can’t contribute more than $44,000 in 2006 if you’re under age 50 or $49,000 annually if you’re 50 or older.) Owner-only 401(k) plans also can permit larger contributions if your spouse works for the business.
- Owner-Only Defined Benefit. This plan may be appropriate for you if you earn more than $100,000 annually from your business, you are over age 40, you can commit to contribute for at least three years, and you desire much larger contributions than are possible with the SEP-IRA or the owner-only 401(k).
Small Business with employees
If you have employees, you may want to investigate one of these plans:
- SIMPLE IRA. A SIMPLE IRA is easy to set up and inexpensive to administer. In 2006, you and each of your employees can contribute up to $10,000 to a SIMPLE IRA (or $12,500 if age 50 or over). Your business is generally required to match both your and your employees’ contributions, dollar for dollar, up to 3 percent of their salary, unless you decide to put in 2 percent of each eligible employee’s compensation.
- Safe Harbor 401(k). A Safe Harbor 401(k) offers the features of a traditional 401(k), but the amount you can defer from your salary is not limited to whether your employees contribute. You, as the business owner, benefit because you can contribute up to the annual maximum ($15,000 in 2006 or $20,000 if you’re 50 or older), regardless of how much your employees contribute. Your business is generally required to match both your and your employees’ contributions, dollar for dollar, up to 4 percent of their salary, unless you decide to put in 3 percent of each eligible employee’s compensation.
- Safe Harbor 401(k) with Age-Enhanced Profit Sharing. Your business can make additional profit-sharing contributions to a Safe Harbor 401(k) plan. If you are older than most of your employees, you can structure your plan so that the contributions going to your account, and to those of your key employees, are much higher than the percentage going to most employees.
Which retirement plan is right for you? It all depends on your individual situation. Your tax adviser and investment representative can help you choose the plan that’s right for your needs—now, and in the future.