ING Business Retirement Options; 401k, SEP IRA, Simple IRA, Profit Sharing, IRA

In recent years, Congress, recognizing the huge impact that small enterprises are having on the new job growth, has supported a whole new breed of retirement plans tailored to the special needs of smaller ventures.  These plans are more flexible, less expensive, and much easier to administer, yet they have retained the same benefits that have made them so popular with major companies.

 

Some business retirement plan* options include the following:

 
The features of some of these retirement plan options may include:

  • The ability to defer personal and business income taxes to later years
  • Allowing employees to take advantage of tax deferred investment earnings to accelerate the growth of retirement savings.
  • Quality benefits that are necessary to attract, hire, and keep quality employees.

     

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401k Plan

A 401k is an employer sponsored retirement plan which allows participants to contribute a portion of their income through individual payroll deductions.  Contributions can either be made on a pre-tax or a post-tax basis, otherwise known as a Roth 401k. 

In some cases, an employer may choose to match employee payroll deductions and make discretionary profit sharing-contributions, but this is not a requirement.

All employees may be eligible to participate in a 401k plan, however, some employers require participants to first complete one year of service with the company (generally 1,000 hours).  In some cases, it may be required that the participant be at least 21 years of age.  When an employee has met all eligibility requirements, he / she may be able to enter the plan on the next "entry date".

The maximum contribution limit in 2009 for a 401k or a Roth 401k is the lesser of 100% of compensation, or $16,500, subject to cost-of-living adjustments.  Those who are 50 years of age or older many be allowed to invest an additional $5,500, subject to cost-of-living adjustments.


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SEP IRA

A SEP IRA (Simplified Employee Pension) offers many of the tax benefits of the qualified plans, but it has fewer of the administrative expenses associated with them.

SEP IRA contributions are discretionary and can be up to 25% of pay for all eligible employees.  Except for grandfathered SARSEPs, participant contributions are not allowed.  All employer contributions are made to IRAs for the benefit of the eligible employees and are 100% immediately vested.  Contributions and earnings grow tax-deferred until the money is withdrawn by the participant.

 
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SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match Plans for Employees) is a retirement plan for small business.  The company must either match participant contributions (dollar for dollar up to 3% of pay) or make a contribution of 2% of pay for all eligible participants.  Contributions are 100% immediately vested.  To sponsor a SIMPLE, a business cannot have more than 100 eligible employees during the preceding calendar year.  Certain notices must be provided annually to eligible employees.


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Profit Sharing

A profit-sharing plan is popular because contributions are discretionary and can be tied to profits.  Up to 25% of covered pay can be contributed each year.  In-service distributions can be made available after five years of participation or when the participant reaches age 591/2.  Hardship withdrawals are also available.


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Defined Benefits

The benefit in a defined benefit pension plan is determined by a formula that can incorporate the employee's pay, years of employment, age at retirement, and other factors.  A simple example is a flat dollar plan design that provides $100 per month for every year an employee works for a company; with 30 years of service, that participant would receive $3,000 per month payable for their lifetime.  Typical plans in the United States are final average plans where the average salary over the last three or five years of an employee's career determines the pension; in the United Kingdom, benefits are often indexed for inflation.  Formulas can also integrate with public Social Security plan provisions and provide incentives for early retirement (or continued work).


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* Withdrawals prior to age 59 1/2 may be subject to ordinary income tax and a 10% penalty.