by +Matt Bagell
(Financial Contributor for Humareso)
As a financial planner,
I run into the same question all the time when talking to a business owner, hr
specialist or controller. Which retirement plan should we set up for our
company? They always seem to be leaning towards a solution but are not
sure what the full details are with regard to the various plan options.
You just need to know
one simple thing; what is "The Reason" for creating one for your
company.
Let's face it.
Some business owners are extremely interested in putting a lot of money
away for retirement and taking advantage of as many tax deductions as possible.
In a perfect world, a business owner could do this while receiving a tax
break from the government at the same time without limitations.
Unfortunately, there are caps to what you can do and it depends on what
plan you choose. On the other hand, a business may be solely focused on
enhancing the benefits they are offering to their employees. The company
may see a retirement plan as a way of keeping their employees around and also
attracting new ones as well.
I could bore you with
all of the details that go along with a SEP IRA, Simple IRA, and 401k plan but
if anything else you have to first realize that these plans allow contributions
to increase to a level much higher than an individual IRA. In 2015, the
traditional IRA contribution limits are $5,500 and $6,500 if age 50 or older.
The limit allows for a decent contribution but a business retirement plan
such as a SEP IRA allows for contributions up to $52,000 in 2015. Now that is a
huge difference. If you put that amount against a 30% tax bracket, you
would receive over $15,000 in tax savings in just this year alone. If your
company has many employees or is likely to grow, a 401k/ Profit sharing plan
might be more suitable. You will have the flexibility to decide if you
want to invest more or less each year and can limit the benefits provided to
the employees based on actuarial testing.
There are many factors
that affect how a retirement plan will work including the age of employees, the
number of employees, the salaries of employees and the contribution amount of
the employer(s). This is why a decision should not be rushed. A Simple
IRA plan, for example, does not allow for higher contribution limits compared
to other business plans but the out of pocket cost is less for the employer to
set up.
Retirement plans are
great ways to really improve your company. The business owner(s) can
really take advantage of putting money away and the employees are also set up
to come along for the ride. Think about it. When else does the government hook
you up with a discount on taxes for saving your own money. By the way, they
also let your money grow tax free before withdrawals. Not a bad situation if
you are able to contribute steadily throughout your working career.
So, first start with
"The Reason" you are considering a plan. From there, it will be a lot
easier to figure out what fits your company's needs.
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