Whether retirement days are near or far, you should be up-to-date on the types of retirement plans available to you and your employees. The plans you will hear most about are IRA, SEP, SIMPLE and 401(k). In addition to providing for your retirement, they may offer significant tax benefits today.
Individual Retirement Arrangement, IRAs are plans that let you set aside money for your retirement. Banks, financial institutions, mutual funds and stockbrokers are among those who offer IRA accounts.
To contribute to a traditional IRA, you must be under age 70½ at the end of the tax year and have taxable compensation greater than or equal to your contribution during the year. Contributions may be tax deductible in full or in part, depending on your circumstances. The amounts earned by your IRA contributions are usually not taxed until you withdraw the money. Generally, you can’t withdraw money from your IRA before you turn age 59½ without paying income taxes and a 10 percent additional tax.
Regardless of your age, you may be able to set up a Roth IRA. You can’t deduct your contributions, but if certain requirements are met, earnings will be tax-free.
The Simplified Employee Pension (SEP) was specifically designed for small employers and has very few administrative burdens or costs. Employer contributions are made directly to IRAs that the employer sets up for the employees. For additional information, see Publication 4333, SEP Retirement Plans for Small Businesses .
How Does a SEP Work?
Quincy Chintz Company decides to establish a SEP for its employees. Quincy has chosen a SEP because the chintz industry is cyclical in nature, with good times and down times. In good years, Quincy can make larger contributions for its employees, and in down times it can reduce the amount. Quincy knows that under a SEP, the contribution rate (whether large or small) must be uniform for all employees. The financial institution that Quincy has selected to be the trustee for its SEP has several investment funds from which the Quincy employees can choose. Individual employees have the opportunity to divide their employer’s contributions to their SEP-IRAs among the funds made available to Quincy’s employees.
Generally, employers can set up a Savings Incentive Match Plan For Employees(SIMPLE) if they have 100 or fewer employees and meet several other requirements. A SIMPLE plan is an arrangement under which an employer makes contributions to employees’ SIMPLE retirement accounts. Additionally, employees can make salary reduction contributions. The two types of SIMPLE plans are the SIMPLE IRA and SIMPLE 401(k) plans. For additional information, see Publication 4334, SIMPLE IRA Plans for Small Businesses .
How Does a SIMPLE IRA Plan Work?
Elizabeth works for the Rockland Quarry Company, a small business with 50 employees. Rockland has decided to establish a SIMPLE IRA plan for all its employees and will match its employees’ contributions dollar-for-dollar up to 3 percent of each employee’s salary. Under this option, if a Rockland employee does not contribute to his or her SIMPLE IRA, then that employee does not receive any matching employer contributions from Rockland.
Elizabeth has a yearly salary of $50,000 and decides to contribute 5 percent of her salary to her SIMPLE IRA. Elizabeth’s yearly contribution is $2,500 (5 percent of $50,000). The Rockland matching contribution is $1,500 (3 percent of $50,000). Therefore, the total contribution to Elizabeth’s SIMPLE IRA that year is $4,000 (her $2,500 contribution plus the $1,500 contribution from Rockland). The financial institution partnering with Rockland on the SIMPLE IRA has several investment choices and Elizabeth is free to pick and choose which ones suit her best.
401(k) plans are the most popular type of retirement plan used today. They can be a powerful tool in promoting financial security in retirement for employees and are a valuable option for businesses considering a retirement plan. Employees may defer a portion of their salary as either a pre-tax or an after-tax contribution.
As with IRAs, there are different kinds of 401(k) plans. Depending on the type, the employer can make either non-elective or matching employer contributions. For additional information, see Publication 4222, 401(k) Plans for Small Businesses .
For assistance in determining what type of plan might be best for you and your small business, see Publication 3998, Choosing a Retirement Plan for Your Small Business .
The Employee Plans (EP) Office of the Internal Revenue Service understands that it's easy to get lost in all the information about retirement plan options allowed by the law. The IRS Retirement Plan Navigator was created to help you find the retirement plan information that's right for your business. The navigator is intended to provide employers with an easy-to-use guide that focuses on three areas: choosing a plan, maintaining a plan and correcting a plan.
You may find the SEP, SIMPLE IRA Plan and 401(k) Fix-It Guides at the IRS.gov website. Tips on how to find, fix and avoid common mistakes for these plans are a sure-fire way to keep your plans healthy. For additional information on employer sponsored pension plans, call Employee Plans Customer Account Services at 877-829-5500.