Small Business Owner Retirement Plans
*GE-28402 (04/04) (Exp. 04/06)

Many small business owners neglect planning for their retirement. They may be too busy building their business to think 25 or 30 years down the road, or they may feel they need to plow all their available cash back into their company.

Whatever the reason, business owners who do not plan for retirement may come up short of retirement income. Not only do they often lack company retirement plans, but also their personal investments may be inadequate. Equity in the business could replace investments, but there’s no way to know how much the company will be worth when retirement comes. Some businesses do well while the owner is active but are worth little without the owner’s energy and expertise.

In addition to providing for their own retirement, many business owners are finding that they must provide retirement programs for their employees. Otherwise, they can’t compete with larger companies for quality employees.

Retirement Plan Options
Several options are open to a small business owner who wants to start a company retirement program. There is no “right” one; each has advantages and disadvantages. Selecting the best-suited plan is a matter of considering funding costs, tax consequences, administrative requirements and, of course, the needs of the company and its employees.

A “qualified” or “tax-qualified” plan is one in which contributions are tax-deductible and there’s no tax on income earned by the plan’s assets until the employee begins receiving payments.

A qualified plan can be a “defined benefit” or a “defined contribution” plan. A defined benefit plan is one in which the amount the participant will receive upon retirement is set (defined) by a formula. The formula usually is derived from the retiree’s length of service and average pay over the last several years of employment. A common form of defined benefit plan is the traditional company pension that pays retirees a guaranteed sum for life. Defined benefit plans can be expensive and administratively complex, so they are generally used in limited cases, such as when an owner is nearing retirement and needs to make large contributions.

A defined contribution plan is more common. The amount of the employer/employee contribution is set (defined) at a particular level, for example, as a percentage of compensation. The employer bears no responsibility for the performance of the product funding the plan.

Defined contribution plans include profit sharing, 401(k) plans, Owners 401(k), SEP-IRA and others. Generally, qualified retirement plans must be available to all full-time and certain part-time employees. Law limits the amount of annual contributions.

Non-qualified deferred compensation plans are those that a business offers to only certain employees—usually the owners and other highly compensated employees. The contributions to such plans are not tax-deductible in the year they are made. However, depending on the plan type, interest that accrues in these types of plans may be tax-deferred.

As with other important financial decisions, selecting the suitable retirement program for your business requires careful examination of all options. This article is intended only to touch briefly on some of the options available to small business owners and self-employed people. You should consult appropriate professionals (tax advisors or other financial and legal advisors) before deciding what’s best for you and your business.

A little planning today can make a world of difference tomorrow.