What Are Your Goals for Your Retirement Plan Employee Benefits?
Retirement plans have purposes other than just saving for retirement. Some retirement plans allow you to take advantage of tax breaks and others are more suited as an employee benefit in lieu of additional or higher compensation. Assessing your goals will allow you make the right retirement plan choice for you and your business.
Business owners have various reasons for setting up retirement plans for their business. The reason there are so many retirement plan choices is because of the variety of goals each business owner hopes to achieve through a retirement plan. While there is no one-size-fits all option, some plans are better-suited than others to help you fulfill your needs in planning for retirement.
Acknowledging that business owners set up retirement plans for different reasons, think about why are you considering one? Do you want to:
- take advantage of the tax breaks, to save more money than you'd otherwise be able to?
- provide competitive benefits in addition to, or in lieu of, high pay to employees?
- primarily save for your own retirement?
You might say "all of the above." However, small employers who want to set up retirement plans generally fall into one of two groups:
- The first group includes those who want to set up a retirement plan primarily because they want to create a tax-advantaged savings vehicle for themselves and thus want to allocate the greatest possible part of the contribution to the owners.
- The second group includes those who just want a low-cost, simple retirement plan for employees.
If there were one plan that was most efficient in doing all these things, there wouldn't be so many choices. That's why it's so important to know what your goal is. Each type of plan has different advantages and disadvantages, and you can't really pick the best one unless you know what your real purpose is in offering a plan.
Once you have an idea of what your motives are, you're in a better position to weigh the alternatives and make the right pension choice. The right pension choice for depends on your goal or combination of goals.
Understanding the pros and cons of offering a retirement plan in your business and the particulars of the basic types of plans available is invaluable in assisting you in making the right plan choice for you and your business.
Maximizing Plan Contributions
If you're interested in maximizing the amount of money that you can contribute to the plan (primarily for your own purposes of saving), check out:
Let's assume that you're a sole proprietor who wants to set up a retirement plan. Which one should you choose?
If you expect your income to remain constant and you want to defer as much of your compensation as the law allows, you may need a defined benefit plan, which would require set annual contributions (note: defined benefit plans tend to lack flexibility and have high administrative costs). These are especially useful for older business owners who anticipate retiring in the not-too-distant future.
If your income is not expected to remain constant, you may also opt for a profit-sharing plan because the rules requiring you to make annual contributions are more flexible than in defined benefit plans.
Plans Benefiting Employees
If you're interested in low-cost, simplified plans for employees, consider:
Assume that you're a small business owner with two employees. Which type of plan should you choose?
If you're younger than your employees, you may want to choose a 401(k) plan because it will give you some flexibility at a relatively low cost.
If you're older than your employees, you may want to choose a target benefit plan, which allows disproportionately greater contributions for older owners.
If high costs and administrative complexity have kept you from offering a retirement plan, you may want to consider a SIMPLE plan.
If you have competing goals for your retirement plan, you will need to prioritize your goals in order to make the best pension choice.
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