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Published May 2006

Choosing a retirement plan
for your business

If you own a small business that sponsors a retirement plan, good for you. You’re saving money, saving taxes and helping your employees at the same time. Are you in the market for a plan? The available information can be overwhelming. Here’s an “executive summary” on business retirement plans.

SEP — The easiest plan for small businesses to create is the Simplified Employee Pension (SEP) plan. You have until the extended due date of your tax return to set up and contribute to a SEP for the prior year. All it takes is one short form and an IRA account for each eligible employee and, presto, you have a deduction from last year’s taxes. Well, you do need to actually put money in the account!

The maximum contribution is the lesser of 25 percent of wages or $44,000 (for 2006). You don’t have to contribute the maximum, or at all, in any given year. You must contribute the same percentage for eligible employees as for yourself, unless your plan takes Social Security into account. Costs of operation are low because there is no annual filing. Employees are 100 percent vested and keep the money even if they change jobs.

SIMPLE — The SIMPLE plan allows employees to defer a part of their own salary each paycheck. The employer matches their contribution up to 3 percent, or makes a fixed contribution of 2 percent for all eligible employees. The maximum employee deferral is $10,000 plus $2,500 for those turning 50 in 2006.

SIMPLE plans are easy to set up — you fill out a short form and open the SIMPLE-IRA accounts. There’s no annual filing, but watch the deadlines for plan setup and employee notices. Employees are 100 percent vested in this plan as well.

Profit-sharing plans — Profit-sharing plans are like souped-up SEPs. They have added options such as vesting schedules and plan loans and more possible variations that allow for greater owner contributions. This flexibility adds costs in terms of annual filings and administration.

401(k) plans — The 401(k) is a feature of a profit-sharing plan. It allows the employees to contribute to the plan, with higher deferral limits and more flexibility, including the new Roth-401(k) accounts. These plans are more complex than ordinary profit-sharing plans. The maximum employee deferral for a 401(k) is currently $15,000, with an additional $5,000 for those turning 50 in 2006.

Defined benefit plans — Less common than the others, this plan provides for specified retirement benefits. The contributions are computed by an actuary based on employee age, salary and other factors. It can work well for older owner/employees getting a late start on retirement planning.

Which plan is best for your business? For lower setup and annual costs, use a SEP or a SIMPLE. For more flexibility and owner advantages, consider a profit-sharing plan with a 401(k) feature. If you have excess cash and are getting a late start, a defined benefit plan may be useful. Be sure to consult with a qualified retirement plan specialist or CPA regarding your own circumstances.

Mary Decker is a CPA, Certified Financial Planner and a principal of Hascal Sjoholm & Co., a full-service CPA firm in Everett. She specializes in tax and estate planning. She can be reached online at www.hascal.com or at 425-252-3173.

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