If you own a business in the electrical industry, you have a lot to think about — sales, expenses, marketing, cash flow, competition — the list goes on and on. However, by spending so much time on the issues of today, you may overlook the concerns of tomorrow. That’s why, if you haven’t already done so, you need to choose a retirement plan for your business.
Which plan is right for you? It depends on different factors, such as how many employees you have and how much you can afford to contribute each year. I’ve found that many contractors and suppliers to electrical contractors don’t like setting these plans up because of rules of the past. Let’s take a look at some popular retirement plans for small businesses for the electrical industry.
Owner-only 401(k) — Also known as an individual 401(k), an owner-only 401(k) offers you many of the same advantages of a traditional 401(k): a range of investment options, tax-deductible contributions and tax-deferred earnings growth. You may even be able to choose a Roth option for your 401(k), which allows you to make after-tax contributions that can grow tax free. In 2009, you can contribute up to $49,000 to your owner-only 401(k) or $54,500 if you’re 50 or older. (To make deductible contributions for the 2009 tax year, you’ll need to set up your plan by December 31, 2009.) These are good plans if you just left a company and are starting a new one with no employees.
Solo defined benefit plan— You may have thought you had to work for a big company to participate in a traditional pension plan, also known as a defined benefit plan, but you can set one up for yourself if you’re self-employed or own your own business. This plan has high contribution limits, which are determined by an actuarial calculation, and your contributions are typically tax-deductible. Again, this is another good plan if you’ve just-started a new company and you’re the only employee.
SEP IRA— If you have just a few employees or are self-employed with no employees, and you’re looking for a low-cost, low-maintenance retirement plan, you may want to consider a SEP IRA. You’ll fund the plan with tax-deductible contributions, and you must cover all eligible employees. (Employees themselves cannot contribute.) You can contribute up to 25 percentof compensation (if you’re an employee of your own corporation) or 20 percentof income if you’re self-employed, up to $49,000 annually. And you can fund your SEP IRA with virtually any type of investment you choose.
SIMPLE IRA —As its name suggests, a SIMPLE IRA is quite easy to set up and maintain, and it can be a good plan if your business has fewer than 10 employees. As the business owner, you must contribute in one of two ways: a dollar-for-dollar match of up to 3 percentof salary or a contribution of 2 percentof employees’ salaries (up to $4,900 per year). Employee contributions are tax-deductible, and your matching contributions are generally deductible as a business expense. Still, while a SIMPLE IRA may be advantageous for your employees, it’s less generous to you, as far as allowable contributions, than an owner-only 401(k), a defined benefit plan or a SEP IRA. For 2009, your annual contributions are generally limited to $11,500, or $14,000 if you’re 50 or older by the end of the year. You can also make a matching contribution of up to 3 percentto yourself. I find that most contractors have SIMPLE’s set up because of the low costs to maintain.
To determine which plan is best for you, consult with your tax advisor and a financial advisor who has experience with small businesses. But don’t wait too long to get started — you’re moving closer to retirement all the time.