Choosing a Retirement Plan for Your Business

Editor’s Note: We are happy to have Omojola as a guest on the blog today. If you’ve wondered how you can prepare for the future with a retirement plan, then you’re reading the right article. Being self-employed doesn’t have to mean you’re unprepared or that you can’t retire comfortably.

A retirement plan provides a systematic way to save for retirement and offers some of the most significant tax savings available today. A retirement plan may be tailored to fit the specific needs of your business by using a variety of plan features.

A retirement plan can also have a positive effect on employee productivity and can help to attract and retain employees. Its value as an employee benefit, combined with the substantial tax savings it can generate for you and your business, underscores the importance of a retirement program for your General Retirement Plan Types

Future Planning There are a wide variety of retirement programs available, all of which can offer tax advantages to both employers and employees. Most retirement programs are based on one of two general types

Individual Retirement Account-Based Plans
Defined Contribution Plans
Defined Benefit Plans

Simplified Employee Pension (SEP) Plan:

SEP is an alternative to the variety of other qualified retirement plans available to a business owner. The SEP Plan offers many of the tax benefits of a qualified retirement plan while eliminating much of the administrative burden and expense often associated with providing retirement benefits for employees.

Employer contributions are deposited directly into an employee’s SEP-IRA. Contributions are eligible employee’s compensation, or $53,000, whichever is less. If the plan sponsor is a self-employed individual or a partnership, then the owner or partners’ contributions will generally be limited to the lesser of (a) $53,000, or (b) 20% of earned less 1/2 of self-employment taxes, without deducting contributions for the self-employed individual/partner from the business that has the plan.

The Savings Incentive Match Plan for Employees (SIMPLE)

SIMPLE IRA Plan was designed to make qualified plans more accessible to small businesses. The SIMPLE IRA Plan is available to employers with 100 or fewer employees who have no other qualified retirement plans. For existing businesses, the SIMPLE IRA plan must be established by October 1 to make contributions for the current year, or as soon as administratively possible for businesses established after October 1. Employee contributions are made on a salary deferral basis, and employer contributions must be made by the business’s tax-filing deadline, including extensions. Employees are eligible to participate in a SIMPLE IRA Plan if they earned $5,000 or more during any two preceding calendar years and are expected to earn $5,000 or more in the current year. Employers must make contributions to employee accounts in the form of either a dollar-for-dollar matching contribution on employee salary deferrals of up to 3% of employee compensation or non-elective contributions of 2% of employee compensation (subject to $265,000 compensation cap) for all eligible employees.

IRA-Based Plans

Defined Contribution Plans

The Profit Sharing Plan is a relatively flexible qualified plan. An employer may typically contribute up to 25% of includable compensation of all eligible employees on a tax-deductible basis. For 2015, the maximum amount that may be allocated to any one participant could be as high as 100% of the participant’s compensation or $53,000, whichever is less. The contribution percentage and the dollar amount may vary from year to year. Since the decision to make a contribution is made by the employer each year, many employers tie the level of contribution to the profitability of the business, but it is not a requirement that the employer shows a profit in order to make a contribution.

Age-Weighted Profit Sharing Plan

The Age-Weighted Profit Sharing Plan is structured to allow employers to make a discretionary contribution each year while allocating contributions based on each participant’s age and salary. This permits a larger share of the total employer’s contribution to be made on behalf of older employees. The allocation in an Age-Weighted Profit Sharing Plan formula rests on the premise that older employees have less time to accumulate retirement benefits and therefore, a larger contribution must be made on behalf of older participants to make the benefits of all participants equal at retirement. As a result, the percentage of contributions allocated to older participants is increased.

New Comparability Profit Sharing Plan

A New Comparability Profit Sharing Plan is designed to allow contributions to be allocated based on criteria such as job classification, compensation, and age. This enables the employer to allocate a greater contribution on behalf of key employees, especially owners.

Contributions to conventional Profit Sharing Plans are generally allocated to each participant in direct proportion to each individual’s compensation or allocated on another nondiscriminatory basis such as the Permitted Disparity rules. The New Comparability Plans provide for contribution allocations that favor key employees to a greater degree than what can be achieved with conventional plans.

401(k) Plans

The 401(k) Plan is an employer-sponsored plan that allows your employees to make contributions with pretax dollars. These contributions are generally made to the plan through payroll deductions.

Contributions to the 401(k) by employees will reduce an employee’s gross earnings for federal income tax purposes. In 2015, the maximum salary deferral contribution to a 401(k) Plan is 100% of compensation or $18,000, whichever is less. Individuals age 50 or older will be allowed additional “catch-up” contributions of $6,000 ($24,000 total). The combination of employee and employer matching and/or profit sharing contributions that may be allocated to an employee may not exceed the lesser of 100% of compensation or $53,000 ($59,000 for individuals age 50 or older) in 2015.

The Roth 401(k) became effective January 1, 2006, as a complement to the traditional 401(k), allowing employees to make after-tax contributions to their employer’s 401(k) Plan. The contribution limits of a Roth 401(k) mirror those of the traditional 401(k) — employees are able to contribute up to $18,000 of salary in 2015 ($24,000 if age 50 or older), with each employee’s combination of Roth and traditional 401(k) contributions not to exceed these limits.

While contributions to a traditional 401(k) Plan are made with pretax dollars, contributions to a Roth 401(k) are made with after-tax dollars. Each individual will have to analyze the value of receiving a current income tax deduction for contributing to a traditional 401(k) versus the benefit of contributing to a Roth 401(k) and potentially having no taxation on future distributions from the plan.

HOW I CAN HELP

SELECTING INVESTMENTS

Choose appropriate plan investments from a broad range of products.

RETIREMENT PLAN ADMINISTRATION

Record-keeping and plan maintenance are important ongoing responsibilities that should be addressed at the outset, to be certain that the program operates efficiently and complies with all current and future

SETTING A RETIREMENT INCOME GOAL

Help you figure out how much you’ll need to support your retirement lifestyle, how much to save in order to meet that goal and a plan which can help you do so.

DESIGNING A PLAN

We can help you design a plan that will reflect your current business profile and retirement savings goals, and address the needs of your employees.

REPORTING PERFORMANCE

Report regularly on your plan’s investment performance.

Omojoli Headshot Omojola began her financial advisory career with Goldman Sachs in 2014 and was later recruited to Morgan Stanley following 8 years of service as an Intelligence Officer in The United States Army. As a Captain, Omojola completed two combat tours to Afghanistan in support of Operation Enduring Freedom. She graduated from Western New England University with a BA in Government followed by Masters in Public Administration from Central Michigan University. Omojola also attended The College of Financial Planning where she received her Chartered Retirement Planning CounselorSM designation. She holds a Series 7, 65 security licenses and the Life and Variable Annuity Insurance licenses. Omojola utilizes her intelligence and planning skills to develop wealth management strategies that help clients and their families establish goals, strategize solutions, and envision clear and understandable financial path for their future. Omojola immigrated to the United States from Sierra Leone at the age of 8 and resided in Gaithersburg, Maryland. She believes a balanced life is the essence of happiness, As such; she is dedicated to helping her community be a better place to live and work. She is an active volunteer at shelters for battered women and trafficked teenage girls who are in hiding. In her spare time, Omojola enjoys exercising, playing field hockey and golfing.