As a small-business owner, one of the greatest benefits you can provide to your employees is a retirement plan that helps them save for their financial future. Your contributions to a retirement plan are a deductible business expense, and a strong compensation package helps you compete for and retain talented people. As an employer, you have flexibility in choosing a plan or combination of plans that work for your business. Broad categories include:
DEFINED BENEFIT PLANS
A defined benefit plan, such as a traditional pension plan, enables you to make annual contributions, which can be adjusted each year. Some plans feature an automatic annual increase, allowing you to reward employee loyalty. The plan pays out a specified benefit to retired employees.
DEFINED CONTRIBUTION PLANS
A defined contribution plan allows the employee, the employer or both to contribute to an individual account for the employee. A 401(k), allows the employee and employer to make consistent, tax-deferred contributions. The monies in the account are invested and participants choose investments that have the potential to grow taxdeferred. These plans allow annual contributions of up to $18,000 in 2015 and 2016. The employee has the ability to borrow from the plan to cover emergency needs, and employees age 50 and over may make “catch-up” contributions up to an additional $6,000 a year to build for retirement. Employers have the flexibility to establish vesting schedules or options such as a Roth 401(k), funded by after-tax contributions but with the potential to provide for tax-free withdrawals in retirement. Both Roth 401(k) and pretax 401(k) savings plans require minimum distributions in retirement. Both savings instruments will prepare your employees for retirement.
IRAs
There are two types of individual retirement accounts (IRAs) that allow you to make tax-deferred contributions. The Simplified Employee Pension
(SEP) IRA option is one of the easiest and least costly plans to create. As the employer, you make 100 percent of the contributions, which are immediately vested for the employee. In 2015 and 2016, the maximum contribution can be 25 percent of an employee’s salary up to a total contribution of $53,000. It’s not possible to set up a Roth version or to offer loan provisions.
A SIMPLE IRA is a second option you can use if your business has less than 100 employees. Like a SEP, it’s easy to establish and administer, and the plan requires employers to match the employee’s contributions. In 2015 and 2016, the maximum contribution to a SIMPLE IRA for an individual is $12,500, with an additional $3,000 allowed for employees age 50 and older.
DON’T FORGET ABOUT YOUR RETIREMENT
It’s important for business owners to understand all their options when it comes to saving for retirement and helping your employees save for their financial future. While you may be hoping that the proceeds from the future sale of your business will provide for your retirement, you could be putting your future at risk if you’re not saving in another vehicle. A lot could happen to affect the value of your business or your ability to sell it. Establishing a retirement plan may provide a more secure source of future retirement income to supplement the sale of your business assets. Consider working with a financial advisor who specializes in small business retirement plans. A professional can help you make the best choice for you, your employees and your business.
MICHAEL W. K. YEE, CFP 1585 Kapiolani Blvd., Ste. 1100, Honolulu 808-952-1222 ext. 1240 | michael.w.yee@ampf.com
