With current discussions about entitlement plans being cut, this is the perfect time for small businesses to evaluate their resources and start retirement plans if they currently do not offer one to their employees. The small business benefits a number of different ways from retirement plans:
- All employer contributions are tax-deductible.
- Assets in the plan grow tax-free.
- Tax credits and other incentives for starting a plan may reduce costs.
- It can attract and retain better employees.
The benefits for the employees are listed below:
- If contributions are made through payroll deduction, it puts saving on auto-pilot.
- It reduces taxable income.
- The contributions and gains are not taxed until distributed (but there is an early withdrawal penalty).
- There is no penalty for moving assets from one employer to another.
- There is also a Saver’s Credit available for some that meet certain income restrictions, which allows a credit on individual tax returns for contributing to a retirement account.
The first thing a small business needs to determine is what type of plan will work better for the business and the employees. Some options include, IRAs, SEPs, SIMPLE IRA, and 401(k)s. Once a retirement plan is chosen, there are administrative steps involved that include adopting a written plan, arranging a fund for the assets, notifying eligible employees and developing a recordkeeping system. Once this is done, the employer just needs to make the contributions for covered employees, manage the assets and keep up to date with retirement plan laws. Some retirement plans are more labor intensive than others. Of course the entire process can be outsourced to companies that specialize in this. It’s not as difficult as it sounds, but for guidance, contact a tax advisor of financial planner.
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