Small Business Tax Guide

							Seligman Growth
Retirement Plans



  The 2003 Small Business
  Owner’s Guide to
  Retirement Plans
Economic Growth and Tax
Relief Reconciliation Act

   Good news for retirement plans
    – Increased contribution limits
    – Changes to testing rules
    – Incentives for plan establishment
   ―Sunset clause‖
    – December 31, 2010, reverts to pre-
      2002 rules
Why consider a retirement plan?

   Attract potential employees
   Reward and retain key employees
   Save for your retirement
   Help employees prepare for
    retirement
   Tax advantages
Tax advantages for your business

   You may deduct:
    – Employer contributions
    – Plan expenses
   Self-employed individuals
    – Reduce taxable income
   Tax credits
Tax credit (beginning 2002)

   For small businesses
    – 100 employees or less
    – 50% tax credit up to $1,000 of plan’s
      set-up and annual administrative costs
    – Maximum annual credit is $500
    – Can take tax credit for the first three
      years of a new plan
    Tax advantages for participants

Example:              Without 401(k)   With 401(k)
Monthly income                $3,000        $3,000
401(k) contribution               0           -150 (5%)
27% income tax rate             -810          -770
Take-home pay                 $2,190        $2,080


       Reduction in take-home pay: $110
       Amount invested for retirement: $150
       Annual federal income tax savings: $480
                   Investments Grow Tax-Deferred

                        Regular Taxable Account vs. 401(k) After 30 Years
                          $250,000                                     401(k): $225,044
Contributions:                                                         $164,282 after taxes
$150 per month,           $200,000
less taxes ($110
in regular
account, $150             $150,000
in 401(k))                                                                 Regular: $108,793
                          $100,000
Hypothetical 8%
annual return
(compounded                 $50,000
monthly)
27% tax rate                        $0
                   Results shown are illustrative only and do not indicate the past or future performance of any specific investment,
                   including any of the Seligman Mutual Funds. Your investment return will fluctuate depending on the
                   investments you select. Retirement plan distributions prior to age 59-1/2 are subject to taxes and a 10% penalty.
Retirement plan terminology

   Plan sponsor: business owner
    – Fiduciary: responsible for the plan
   Salary deferrals: employee contributions
   Employer contributions:
    – Discretionary contributions
    – Matching contributions
    – Percentages must be uniform
      for all employees
   Non-discrimination testing
Retirement plan terminology,
continued


   Plan document: outlines plan features
    – Eligibility: who can participate
    – Participants: those who join the plan or
      receive a contribution
    – Vesting: how long until employees
      ―own‖ employer contributions
    – Loans: borrowing from your account
    – Hardship withdrawals: permitted for
      emergencies
Retirement plan terminology,
continued


   Third Party Administrator (TPA)
    – Recordkeeping: tracks contributions
    – Testing: ensures the plan is fair
    – Reporting: tax filing for the plan
   Investments
   Employee communications
Why do you want
to offer a retirement plan?
What are your retirement plan
goals?

Are you starting a plan to…
 Maximize personal contributions?
 Attract new employees?
 Retain or reward current employees?
 Receive tax benefits for your
  business?
What are your business
characteristics?

Keep in mind…
 Number of employees
    – Part-timers vs. Full-timers
    – Year-round vs. Seasonal
   Professional or Labor workforce
   Average employee tenure and
    turnover rates
   Nature of your business — cyclical
    or steady
Business characteristics, continued

   Incorporated
   Unincorporated
    – Consult your tax advisor
Retirement plan options

   Group IRA plans
    – Simplified Employee Pension (SEP)
    – Savings Incentive Match Plan for
      Employees (SIMPLE-IRA)
   Qualified plans
    – 401(k) plan
    – Profit Sharing plan
    – Money Purchase plan
    – Defined Benefit (DB) plan
Group IRA plans

   Simplified
   Contributions deposited into
    employee IRAs
   Low fiduciary responsibility
   Any employer contributions are
    100% vested
   No TPA is required
   Cannot be combined with other
    plans
SEP plan
(Simplified Employee Pension)

   Discretionary employer
    contributions
    – 0% to 25% of compensation
    – Capped at $40,000 per employee
   Eligibility
    – Up to three years of service
    – Age 21
    – Minimum $450 in earnings
   Employee-directed IRA accounts
Contributing to a SEP —
example

Sam Ford Executive Search, Inc.
 Sam Ford (owner) and two employees
 7% contribution this year

            Salary      Contribution % of Total
Sam Ford    $150,000    $ 10,500        71%
Jane        $ 35,000    $ 2,450         17%
Joe         $ 25,000    $ 1,750         12%

Owner receives 71% of total $14,700 contribution
               SEP benefits

                  Business owner can save up to $40,000
                   per year
SEPs are
the only          Contributions are flexible
plans that        Establish and fund up to tax filing due
you can            date
establish in      Three-year service requirement for
the
                   eligibility
following
year.             Easy to administer and maintain
                  Contributions are attractive to
                   employees
SEP disadvantages

   Completely employer-funded
   All contributions 100% vested
   Part-time and seasonal employees
    eligible
   Little flexibility
    – No loans or hardship withdrawals
SEP Plans



Ideal for the self-employed or
for very small firms with a
few key employees
           SIMPLE-IRA plan

              Companies with fewer than 100 employees
              Employee pre-tax salary deferrals up to
               $8,000
No
                – $1,000 catch-up contribution if age 50+
testing
              Employer contributions are mandatory
required        – Dollar-for-dollar match of 3%, capped at
                  $8,000 (may be reduced to 1% in any 2 out of
                  5 years)
                – Non-elective contribution of 2% of
                  compensation
              Eligibility: up to two years of service, $5,000 in
               earnings
Contributing to a SIMPLE —
example

Tyler Landscaping Co.
   Kim Tyler (owner) and four eligible employees
   3% employer match this year
             Salary      EE Contribution 3% ER Match
    Kim T.   $ 250,000   $ 8,000        $ 7,500
    Bob      $ 100,000   $ 8,000        $ 3,000
    Phil     $ 40,000    $     0        $     0
    Sara     $ 35,000    $ 3,500        $ 1,050
    Todd     $ 25,000    $ 750          $ 750

Owner receives 61% of total $12,300 match
SIMPLE-IRA benefits

   Business owner can save up to $16,000
    per year
   Shifts most funding responsibility
    to employees
   Employer contributions are flexible
   Two-year service requirement for
    eligibility
   Easy to administer and maintain —
    no plan testing
   Desirable features at low cost
SIMPLE-IRA disadvantages

   Employer contributions are mandatory
   All contributions 100% vested
   Part-time and seasonal employees
    eligible
   60 days’ advance notice of plan
    establishment
   Little flexibility
    – Employer contributions are limited
    – No loans or hardship withdrawals
SIMPLE-IRA



Ideal for small companies
that are willing to make a
small contribution in
exchange for plan simplicity
Qualified plans

   More complex
   TPA required for testing and reporting
   Vesting schedule for employer
    contributions
   Employer selects investment menu
   More fiduciary responsibility
   More flexible features
    – Loans and hardship withdrawals
    – Can be combined with other plans
Profit Sharing Plan

   Discretionary employer contributions
    – 0% to 100% of compensation
    – Capped at $40,000 per employee
    – Vesting schedule can be applied
   Eligibility
    – 1 year of service (1,000 hours)
    – Age 21
   Can be added on to a 401(k) plan
   Loans
    – Now available to business owners
Contributing to a Profit Sharing
Plan — example

Dental Associates, Inc.
   Dr. Jones, dental hygienist, receptionist
   25% Profit Sharing
      Salary            25%        Contribution
Dr. J $ 175,000         $ 42,500   $ 40,000*
Tina $ 50,000           $ 12,500   $ 12,500
Tony $ 22,000           $ 5,500    $   5,500
Dr. Jones receives 69% of $58,000 contribution

*Maximum contribution is $40,000
Profit Sharing Plan benefits

   Business owner can save up to $40,000
    per year
   May exclude part-time employees
   Provides contribution flexibility
   Offers vesting schedule
   Can be offered along with a 401(k)
   Very attractive to prospective
    employees
   Can allow for loans
Profit Sharing Plan
disadvantages

   Completely employer-funded
   Requires a TPA
   Requires IRS tax return filing
   May be expensive to fund and maintain
Profit Sharing Plans



Ideal for smaller, closely-held
companies
                    One(k) plan

                       Owner-only businesses with no full-
                        time employees other than a spouse
Business owners
                        – Sole proprietorships, Partnerships, C-
who already have
another type of           Corporations, S-Corporations
plan may be able       Set aside up to $40,000
to contribute
more to a One(k)        – Pre-tax salary deferrals up to $12,000
— and                   – Employer contributions, tax deductible
consolidate
                          up to 25% of compensation
retirement assets
                        – $2,000 catch-up contribution if age 50 +
                        – Loans and hardship withdrawals
                  Why One(k)?

                  Example: Sam Fletcher, a self-employed consultant
                  with no employees and a net income for the year of
SEP, Profit       $150,000
Sharing, and
One(k) all have   Sam’s maximum contribution:
the same limit      SEP            Profit Sharing                                    One(k)
— $40,000 —         $28,519        $28,519                                           $40,000
but SEP and
Profit Sharing    If Sam is at least age 50:
contributions         SEP               Profit Sharing                               One(k)
may be reduced        $28,519           $28,519                                      $42,000
by other rules    Maximum compensation for calculating SEP and Profit Sharing contributions for
                  self employed individuals is determined by a separate computation and must be
                  reduced by certain amounts; see IRS Publication 560 for details and worksheets.
401(k) plan

   Funded with employee contributions
    – 0% to 100% of compensation
    – Capped at $12,000
    – $2,000 catch-up contribution if age 50+
   Contributions at the employer’s
    discretion
   Eligibility
    – 1 year of service (1,000 hours)
    – Age 21
401(k) plan — flexibility

   Flexible features
    – Discretionary or fixed employer match
    – Profit Sharing contributions
    – Variety of vesting schedules
    – Employees choose contribution rate and
      investments
    – Loans
    – Hardship withdrawals
401(k) benefits — participants

   Pre-tax salary deferrals up to
    $12,000 (plus catch-up)
   Additional employer contributions
    permitted
   Employee-directed investments
401(k) benefits — employer

   Shifts funding responsibility to
    employees
   May exclude part-time employees
   Provides highest degree of flexibility
   Popular and well-known among
    employees
   Now available to sole proprietors who
    want to maximize their contributions
401(k) disadvantages

   Testing may limit contributions of
    higher-paid
   High employee participation is a must
   Employer contribution may be
    necessary
   TPA required
   More fiduciary responsibility
Safe Harbor 401(k)

   Employer MUST make a 4% matching
    or 3% nonelective contribution
    – 100% immediate vesting
   No discrimination or top-heavy testing
    – Allows higher paid employees to
      maximize contribution amounts
401(k) Plans



Ideal for larger companies
that want flexibility and
employee contributions.
Employees must be willing to
participate in the plan.
Selecting Your Plan
Keep in mind…

   Everything is a trade-off when
    selecting a plan
   You derive the same or greater
    benefits than your employees
   Having a plan is well worth it
   There is a plan out there that’s
    right for you
               J. & W. Seligman & Co.
               Incorporated

                  Investment business since 1864
                  Launched its first mutual fund in
                   1930
                  Approximately $18 billion in assets
                   under management

The Seligman
  Brothers
Seligman Retirement Services

   Focus on serving the retirement needs
    of small business owners
   Full product line:
    – Comprehensive, cost-competitive 401(k)
    – One(k) for owner-only businesses
    – Profit Sharing Plans
    – No-fee, easy-to-establish SIMPLE-IRA
      and SEP programs
   Time Horizon MatrixSM
The next steps…

   Assess your goals and situation
   Ask questions
   Look for consultative advice
   Find the plan that works for you
For more complete information about Seligman Mutual
Funds, including prospectuses that contain information,
about risks, fees, and expenses, please contact your
financial advisor. Investors should read the prospectus for
a Seligman Mutual Fund carefully before investing or
sending money.

Seligman does not provide tax or legal advice. The
information contained herein is for educational purposes
only and is not a substitute for consultation with your
professional tax or legal advisor.



  Distributed by Seligman Advisors, Inc.              Rev. 4/03