Retirement and pension plans are a great way to look out for your employees and encourage them to be financially responsible. Employers who offer these plans are more likely to have higher employee retention and can enjoy certain tax benefits. However, deciding what plan to offer can be a difficult decision for business owners.
To find the right fit, you will have to explore the numerous options available. This can be a very confusing and overwhelming process. You need to consider your priorities and what available plans can offer. Each plan has both positives and negatives regarding costs, simplicity and who contributes.
By exploring the options and weighing the costs of retirement and pension plans, you can find the best fit for you and your business.
Retirement and Pension Plans
A full listing and thorough description of plans available can be found through the IRS Retirement Plans website. Listed here are some of the more common plans with a basic overview of each:
These plans can be opened by anyone and have the benefit of being tax–deferred, depending on various circumstances. There are two main IRA types: Traditional and Roth IRAs. With a Traditional IRA, you can deduct your retirement contributions from your income taxes, but will be responsible for paying taxes on your gains later. With a Roth IRA, you cannot deduct your retirement contributions, but don’t have to pay taxes on the savings if you withdraw them at retirement age. Contributions can be from the employee and/or the employer.
Also known commonly as “matching,” this plan is geared for small businesses. You must have less than 100 employees and have no current retirement plan in place to use a SIMPLE IRA. In this plan, an employer agrees to either “match” the amount contributed by an employee (up to a certain amount) or contribute a certain percentage of the employee’s salary. Administration is simple and cost-effective, making it a reliable option for many small businesses.
These plans can be offered by anyone and are popular because they permit higher employee-deduction contributions. The employer has the option to match the contributions. The accounts are not taxed until the employee removes the funds upon retirement or until they reach retirement age (59.5). Since this plan often has high administrative costs, it is suggested for companies that have over 25 employees.
Profit-sharing plans are funded by the company’s profits, and the employer is in charge of all contributions. The employer can decide how much to offer and can change this amount yearly. The amount “shared” with employees is based on a percentage of their income, and employees cannot contribute to the plan. These plans are usually used alongside another retirement plan, but are fairly easy to implement and maintain.
Another option that is good for small businesses, SEP plans are low-cost and easy to maintain. All contributions are from the employer, and the employer can vary those contributions annually, making it ideal for businesses with uncertain cash flow. A business of any size can implement an SEP plan.
These plans are for tax-exempt entities, such as public schools, churches, hospitals and other non-profits. 403(b) plans offer higher employee-payroll contributions, and employers can choose to let the employees decide where they invest their assets. This type of plan is good for larger companies, and the difficulty and cost of administration will vary depending on employer involvement.
There are many low-cost options for retirement and pension plans since employers are not always required to contribute anything. Contributions, however, are an added benefit that will attract employees. Since tax deductions are possible and administrative costs can run high depending on the plan you choose, it is suggested to speak with your accountant or a financial planner before deciding on a plan. These professionals can help determine which option is best for your business and can predict the costs that will be encountered.
Consider the needs of your business and which plan will provide the optimum value for your time and money. Also consider which plan will benefit you and your employees as best as possible. You need to thoroughly understand the ins and outs of the plans available and decide what you need and consider important. Consider the tax advantages, who will be contributing and the simplicity of managing the plan.
For more guidance, see the “Help with Choosing a Retirement Plan” section of the IRS website or the U.S. Department of Labor and the American Institute of Certified Public Accountants’ sponsored page, “Choosing a Retirement Solution.” Both sites offer thorough breakdowns of plans available and resources for helping you choose and manage a retirement plan.