An attractive feature of business retirement plans is that individual contributions can be tax deferred and company contributions are tax deductible. In addition, the contributions have the potential to grow tax-deferred until it’s withdrawn, generally at retirement.
Different business retirement plans have different features, so it pays to shop around. Alamo Capital offers you several options:
Simplified Employee Pension plans (SEPs) are pension plans designed for self-employed individuals and small businesses. With these plans, there are few requirements to file with the IRS. SEPs allow an employer to make sizable contributions to employees that are tax deductible to the employer and can be excluded from employee’s gross income. The 2016 maximum contribution level is up to a $53,000 maximum or 25% of income (20% for self-employed income). Full contributions can be made in profitable years, and cut back in others.
A retirement plan that may be established by employers, including self-employed individuals. These plans are comparatively inexpensive, and combine an employer match to the employee contributions. The employer is allowed a tax deduction for contributions made to the SIMPLE. The employer has two alternatives when it comes to making contributions. Contributions to SIMPLE IRAs are immediately 100% vested, and the IRA owner directs the investments. Yearly contributions are capped at $12,500, plus catch-up contributions of $3,000 for employees 50 and up.
A 401(k) plan is a salary reduction plan that is offered by employers. It offers tax deferred benefits for your retirement investments. You contribute a percentage of your pretax income each pay period to your 401(k) and choose specific investments from among those that are offered for the plan. Any earnings you receive from the 401(k) plan are accumulated tax deferred. The maximum annual employee contribution is $18,000, plus a $6,000 catch-up provision for employees over the age of 50. Typically these plan tend to have more reporting requirements and administrative operating costs.
Contributions to a Roth 401(k) plan can also be made with after-tax dollars.
A plan that enables you to distribut profits in profitable years according to a formula set by the employer ahead of time. This is a great way to give employees a sense of ownership in the company. The company decides what portion of the profit is to be shared. There are restrictions as to when and how an employee can withdraw these funds without penalties. Best suited for businesses with fluctuating profits and employee turnover. Contribution limit the lesser of 100% or compensation or $53,000.
These plans tend to be well-matched for owners of small, profitable businesses, who are closer to retirement age and would like to catch up on their savings. Generally the owner is at least fifty years old or within 10 years of retirement. One main limitation is that you’re locked into the program once it’s started, and it requires an additional expense to maintain the plan with the IRS and the Department of Labor. Contributions in 2016 can result in a retirement benefit of no more than 100% of the average pay during the three highest-paid income years or $210,000.
A Money Purchase Pension Plan allows a company to make annual contributions that are not tied to profits. In many ways it operates like a profit sharing plan except the company is required to contribute the same percentage of employees’ salaries each year. For added flexibility, offering both a profit sharing and money purchase plan gives a company the ability to boost contributions when they want. Employer contributions are mandatory, and are limited to 25% of total compensation, up to $53,000.
Withdrawals taken prior to age 59 ½, may be subject to an additional 10% federal tax penalty and possibly state income taxes. Talk to a Alamo Capital advisor to learn more about the different options, including mandated limits, tax consequences and qualified contributions and distributions.