|
Choosing a Retirement Plan |
|
|
|
|
Written by Administrator
|
|
Tuesday, 11 September 2007 |
Choosing a Retirement Plan That Works For You, Your Business and Your Employees Provided by, Thomas V. Bednar Financial Advisor UBS Financial Services Inc.
Most of us look forward to enjoying the freedom of a financially secure retirement. Of course, how well you live tomorrow is largely determined by how well you plan – and save – today. It used to be that most workers could rely on Social Security payments as a major source of retirement income. However, that is no longer the case as Social Security was not designed for the America of today. As people expect to maintain higher income streams during longer periods of retirement, Social Security payments simply do not go as far as they used to. The secret to retiring successfully can be summed up in one word – planning. Essentially, that means planning early, planning sensibly and planning knowledgeably. There are a number of effective ways for business owners, professionals and their employees to save for the future – with many retirement plan alternatives from which to choose. A retirement plan can offer important advantages to business owners: — Tax-deductible contributions to the plan that may reduce your current tax bill— A valuable recruiting tool which may be positioned as part of the total benefits package offered by your business, and which can in turn help in retaining valued employees. Whether you are considering adopting a retirement plan for the first time or evaluating an existing one, it's important that you understand your options.What Are Your Options?In general, there are two types of retirement plans – defined benefit plans and defined contribution plans. With a defined benefit plan, each participant's retirement benefit is determined by the formulat set forth in the plan. Employer contributions vary from year to year and must meet certain funding requirements, and the plan sponsor assumes the investment risk. Since annual contributions are based on the amount required to provide the promised benefit, the closer your employees are to retirement, the larger the permitted tax-deductible contribution will tend to be. Therefore, you may be able to contribute more to a defined benefit plan than to a defined contribution plan, which has additional participant-based contribution limits, and therefore you may be able to provide a greater benefit in a shorter period of time. With a defined contribution plan, benefits depend upon the level of contributions made and investment performance. Employees’ benefits are based on the amount of assets in their individual accounts at retirement. The plan may be structured so that each plan participant assumes the investment risk of his/her own account. Some of the plans available include simplified employee pension plans (“SEP-IRAs”), profit sharing plans, 401(k) plans, and savings incentive match plans for employees (“SIMPLE IRAs”). Let’s take a look at each of these plans. A SEP-IIRA is for business owners seeking a flexible, low-cost retirement plan that is easy to establish and maintain. With the SEP-IRA, each eligible employee sets up an individual retirement account ("IRA") into which the employer makes contributions. Since the employees each have their own individual accounts, they bear the investment risk. This plan may be especially suitable for new businesses or companies with cyclical profit histories since the employer can vary the amount to be contributed from year-to-year – or even choose not to contribute at all in less profitable years. A profit sharing plan is for business owners seeking more flexibility in plan design than is available in a SEP-IRA. Although both plans can be structured to allow contributions to vary each year, a profit sharing plan can have additional features such as a vesting schedule (to reward longer-term employees) and a loan program. For employers who want their employees to share in the funding of their retirement plan, a 401(k) plan may be a viable choice. A 401(k) plan is a form of profit sharing plan that allows employees to make salary deferral contributions. In addition, the employer may choose to make matching and/or discretionary contributions on a tax-deductible basis. Before adopting a 401(k) plan, the employer should first consider the additional administrative requirements and costs that may be incurred with this type of plan. A SIMPLE IRA is for businesses that have 100 or fewer employees and do not currently contribute to a retirement plan. It enables a business owner to establish a 401(k)-type savings plan without all of the typical costs and complexities associated with a traditional 401(k) plan. Employees can elect to make salary deferral contributions. In addition, the employer is required to make contributions each year under one of two formulas. Where to Get HelpProviding sufficient retirement income for you and your employees at a reasonable cost to your business requires careful planning and investing. Whether you want to establish a retirement plan for the first time or have your existing plan evaluated, a financial advisor can consult with you to help you identify retirement plan and investment alternatives best suited to your needs and those of your business and your employees. Retirement planning for you and your employees is far too important to put off. Take the time now and understand your choices and identify your goals. There are a number of tools available to help analyze the future needs of both you and your employees. Remember that professional advice can be crucial in creating a plan that is appropriate for you and your business. UBS Financial Services Inc. does not provide tax or legal advice. Consult with your tax and legal advisors regarding your specific situation. Depending on your needs, we can help you implement your retirement strategies through both our advisory and brokerage capabilities |
