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FINANCIALLY $PEAKING: Have You Thought About the Future?

Have You Thought About the Future?

We recently compiled a survey of clients who began using our services over the last three years. Although the majority of these firms had been in business for over three years, about one-third had not yet set up a retirement plan.

For some who did not, they simply could not afford to do so. For the others however, they later determined they could afford to do so but had not been informed about costs or how to go about establishing a retirement plan.

We live in one of the most productive and richest economies in the world yet most Americans are concerned as never before about being able to afford retirement. The Social Security Administration states that, if you have average earnings, your social Security benefits will replace only about 40% of your preretirement expenses. Most financial advisors say you'll need about 70% of pre-retirement earnings to maintain your standard of living after retirement. Add to that the fact that were living longer and healthier lives and there is a greater need for more savings.

A small business owner has several means available to save for retirement and can do so with pre-tax dollars. Consider the following three types of retirement plans:

1. SEP-IRA (Simplified Employee Pension). Beneficial for self-employed persons or small business owners with variable earnings and providing minimal governmental reporting. The owner is not committed to contribute anything. All employees must be included who are at least age 21, and have earned at least $400 in three of the preceding five years. Contributions are limited to the lesser of 15% or $30,000.

The contribution limits applies to wages or, if a sole proprietorship, to earnings of the business. Employees cannot make voluntary contributions.

2. 401-(k) Plan. This is a plan which accepts employee voluntary contributions. Employer contributions can be discretionary. In other words, an employer is not required to make a contribution and employees can make before-tax contributions. As a minimum, all employees age 21 and older with at least one year of service are eligible to participate. Employee contributions for 1999 were limited to 25% of compensation or $10,000. Total contributions cannot exceed the lesser of 15% of earnings up to $30,000 per participant.

While the employer is not required to make any contribution, the plan is subject to administration costs of government and participant reporting, discrimination testing and other requirements.

3. SIMPLE IRA or SIMPLE 401-(k) Plans. Accepts pre-tax, employee voluntary contributions but does require employer contributions which are tax deductible. Employees earning at least $5,000 in the prior two years and expected for the current year must be eligible. The SIMPLE 401-(k) allows for participant loans and has other features in addition to the SIMPLE IRA.

Annual government reporting and discrimination testing is not required. However, the employer is required to make a contribution by matching 100% of the employees contributions up to 3% of compensation or contributing a straight 2% of all employee compensation up to $3,200 per eligible employee whether or not employees contribute to the plan.

In general, monies contributed to any of these plans can be invested in various ways. Most mutual funds accept retirement plan contributions, provide a wide variety of investment selections and allow for Internet access of account balances. If you do not have a retirement plan for your business or are considering a change to your current plan, be sure to learn all the features about these plans and consider the options. As you can see, each type of plan has features which may or may not be right for you. Above all, be sure you are planning for your retirement.

For more information, clicak on the Authors Biography at the top of this page.

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Plastics Distributor® & Fabricator Magazine
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