Money Talk: Planning your retirement planning

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Surprisingly few small or mid-sized business owners have set up retirement savings.  Today’s uncertain times tempt the owners of many rural building businesses to skimp on savings, figuring to make up those savings later.

This strategy — or lack of a retirement savings strategy — may be having an impact on more than your future.

The building business itself may be feeling the effect as it becomes more difficult to hire or retain good employees because of the lack of a retirement plan.  Good employees are, after all, unlikely to want to work where both the business’s and their futures are uncertain.

Owners of small building businesses are often deterred by the complexity associated with retirement planning and the potential costs involved. However, there is good reason to begin funneling at least some of the operation’s dwindling profits into a retirement plan.

Thanks to the 2006 Pension Protection Act, a federal tax credit is available for 50 percent of the cost of setting up and administering a retirement plan.  A similar tax credit exists for the self-employed building contractor.

Retirement plan options vary in how much money can be contributed, whether employees other than the owners may participate, what (if any) contributions the employer must make on behalf of employees, what deadlines there are for creating and putting money into the plan and how difficult it is to run the plan.

It is easy to see why retirement planning is often placed on the back burner.  However, building contractors and business owners are uniquely placed to take advantage of some retirement-plan options that most employees do not get to choose from.

Some of the options

• A SIMPLE  IRA or “Savings Incentive Match” Plan is considered an attractive option for small employers looking to keep workers happy. Employers with fewer than 100 employees can select this option that allows the owner and any employees to save up to $10,500 per year of their own money; if an employee is older than 50, an additional “catch-up” amount of $2,500 is allowed.
In addition, employers must either match workers’ contributions at up to 3 percent of salary or pay a flat 2 percent.  Fees are generally low and administration chores minimal, although the business owner must set up the SIMPLE IRA before October 1.

• SEP IRAs or Simplified Employee Pension IRAs are considered the best strategy for a sole proprietor looking to save only in profitable years. What sets a SEP IRA apart from a SIMPLE IRA is  the employer funds the SEP IRA entirely. The employer can contribute up to 25 percent of compensation to the plan, up to an overall maximum of $46,000 per employee in 2008 and $49,000 in 2009.

Business owners have extra time to set up a SEP IRA; the deadline is the same as the deadline for the business income tax return, which means that most businesses that use a calendar year have until March or April of the following year to set up a SEP IRA.  SEP IRAs are also fairly easy to administer and offered at a relatively low cost by many financial institutions.

• Profit-sharing plans: Retirement plans based on profit sharing appeal to employers and employees, too.  Employers like them because they are only required to contribute when the business makes a profit.  Employees find them attractive because it invests them with a sense of shared reward in the company’s success.  Like SEP IRAs, profit sharing plans are generally all employer-funded. 

Because profit-sharing plans generally involve added complexity, cost may be higher than for other plans and some administrative tasks may be more burdensome, or require professional assistance.

• SIMPLE 401(k) plans share many similarities with SIMPLE IRAs. The same 100-employee limit applies, as does the $10,000 limit on employee contributions.  The employer also has the same choice between contributing 2 percent of compensation or matching up to 3 percent of the employee’s contribution.

The differences are relatively minor.  How and when a new employee qualifies for the plan are slightly different and there are some variations in the amount that highly compensated employees can receive in employer contributions.  Perhaps the biggest difference is that SIMPLE 401(k) plans can include provisions that allow employees to take loans against their account balances.
That is not an option with SIMPLE IRAs.  Oh, and do not forget, the building business must file an information return with the IRS.

• Single Participant 401(k) plans are best for those who work for themselves and want to save more. These plans allow business owners without employees (other than a spouse) to take advantage of the higher limits that 401(k) plans allow. By using a single-participant 401(k) plan a business owner can choose to save $15,000, plus an additional $5,000 for owners older than 50.  In addition, the business can make a tax deductible employer contribution on the owner’s behalf of up to 25 percent of compensation.  The total contributions cannot exceed $44,000, indexed for inflation.

Although a business owner must create the plan before the end of the tax year, deposits are not required until the tax return deadline. In some circumstances, an IRS information form is required.  And, because the single-participant 401(k) is somewhat more complicated than SIMPLE and SEP-based plans, not as many providers offer them, frequently resulting in somewhat higher costs. The higher contribution limits may mean that potential tax savings will more than make up for any additional costs.

Those building businesses with 100 or fewer employees can claim a tax credit, equal to 50 percent of the cost of establishing and/or maintaining a new retirement plan, over a three-year period.  The tax credit is a direct reduction of the operation’s tax bill rather than a deduction from the income upon which that bill is based.  The maximum credit for any tax year is $500.

If you’re self-employed

For the self-employed, a Retirement Savings Contributions credit, the so-called “saver’s credit,” allows a tax credit of as much as $1,000 — in addition to the exclusion or deduction from gross income for making elective deposits and IRA contributions that are otherwise allowed.  Eligible taxpayers may claim a nonrefundable credit for their contributions to elective deferral plans, plus an individual retirement account.

Retirement plans are not just for big businesses.  As the IRS points out, they are also available for sole proprietorships, the self-employed, professionals and small business owners. What’s more, tax laws provide significant tax incentives for employers that establish and maintain retirement plans. 

Generally, under the plans outlined, contributions that are set aside for retirement may be currently deductible by the employer, although not taxable to the employee until distributed from the plan.  Obviously, there are many, factors to be considered when choosing the retirement plan that is right for you and your building business.  Professional guidance is a good way to explore the many benefits and potential pitfalls.

Investing in a retirement plan for financial security when you retire is a strategy best undertaken now, rather than later.  As a bonus, you and the building business may qualify for significant tax breaks as well as other incentives.

Mark Battersby has 30-plus years experience with small business issues as a tax and financial consultant, lecturer and writer. Contact him at 610-789-2480 or MEBatt2@Earthlink.net

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