"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