Set Up Retirement Plans for Business Owners

Most employees save towards their retirement with employer based plans, but if you are self-employed, you need to know how to set up a retirement plan on your own.

Advances in medicine are leading to increasingly longer lifespans, thereby making having a sound retirement plans in place even more important. Most employees save towards their retirement with employer based plans, but if you are self-employed, you need to know how to set up a retirement plan on your own.

Steps to Setting up a Simple Retirement Plan:

  • Start Early: From the start of your professional career, on a monthly basis, set aside cash towards your retirement fund. Put this in a separate bank account that you will not touch under any circumstances. It is therefore secure till you need it and meanwhile it is growing by earning interest
  • Make Regular Contributions: Ensure that you make regular deposits on a monthly basis. Set a minimum level for this amount and ensure that you stick to it. Most retirement plans have an automatic savings plan, which will transfer the money directly from your bank account to your retirement account.
  • Make Small Payments: Don’t be overambitious with your monthly payments, or you may not be able to sustain the account as other expenses crop up. Instead, make more realistic, small payments that you increase slowly as your business develops. Don’t restrict yourself to small payments; you may receive a performance bonus or some other unexpected income. When this happens, keep aside a little for entertainment and then put the rest into your retirement fund.
  • Shop Around: Check the prospectuses of mutual fund companies and banks. Also make sure that you compare the rates of return and fund history, so that you make smart decision.

Individual Retirement Account (IRA)

A Simple IRA is designed especially for small businesses (with less than 100 employees) and provides a simplified way to make contributions towards your retirement and that of your employees. You may also deduct all contributions to your employees’ SIMPLE IRAs on your company’s tax return.

Features of a Simple IRA

  • Your company must either generally match employee contributions (up to 3% of pay) or make a contribution of 2% of pay for all eligible employees.
  • All Contributions are immediately vested.
  • Certain notices must be provided annually to eligible employees.
  • A Simple IRA plan may only be maintained on a calendar-year basis, not on a fiscal year basis.
  • Eligible employees are all employees of the employer who received at least $5,000 in compensation from the employer during any 2 preceding calendar years (whether or not consecutive) and who are reasonably expected to receive at least $5,000 in compensation during the calendar year.

To Set Up a Simple IRA

  • Adoption Agreement: You can establish a Simple IRA by adopting an IRS model SIMPLE IRA plan, using either IRS forms or a prototype SIMPLE IRA plan that has been approved by the IRS. Approved prototype SIMPLE IRA plans are offered by banks, insurance companies, and other qualified financial institutions.
  • Inform Employees: On an annual basis, all eligible employees must be informed about the SIMPLE IRA plan and where the contribution will be deposited. This must normally be done 60 days prior to January 1 of a calendar year.
  • Employee Accounts: A Simple IRA must be set up for each eligible employee, with banks, insurance companies, or other qualified financial institutions. Each employee has control over their individual account.

Simplified Employee Pension (SEP-IRA)

The SEP is a low-cost retirement plan that covers all the employees in an organization, including the employer (you). Under this plan, the employer directly deposits a percentage of the employees’ income into traditional individual retirement accounts (SEP-IRAs). A SEP does not have the start-up and operating costs of a conventional retirement plan, and allows for a contribution of up to 25 percent of each employee’s pay.

Advantages of a SEP

  • Contributions to a SEP are tax deductible on the contribution as well as any interest earned on investments through the account
  • Regular monthly contributions are easier than larger annual contributions
  • As the money is deducted at source, the employee automatically learns to manage his expenses with less income
  • Minimal documentation to be filed with the Government, by the employee
  • Sole proprietors, partnerships, and corporations can set up SEPs.
  • Administrative costs are low

If you are a business owner, having a sound retirement plan in place can ensure that your financial future and that of your family is ensured.

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