Retirement Plans For
By : Rodney Nelson | Associate Financial Advisor , CUSO Financial Services , LP , at University Federal Credit Union
Types of plans
There are several types of retirement plans to choose from , and each type of plan has advantages and disadvantages . This short discussion covers the most popular plans . You should also know that the law may permit you to have more than one retirement plan , and with sophisticated planning , a combination of plans might best suit your business ' s needs .
Profit-sharing plans
Profit-sharing plans are among the most popular employersponsored retirement plans . These straightforward plans allow you , as an employer , to make a contribution that is spread among the plan participants . You are not required to make an annual contribution in any given year . However , contributions must be made on a regular basis .
401 ( k ) plans
A type of deferred compensation plan , and now the most popular type of plan by far , the 401 ( k ) plan allows contributions to be funded by the participants themselves , rather than by the employer . Employees elect to forgo a portion of their salary and have it put in the plan instead . These plans can be expensive to administer , but the employer ' s contribution cost is generally very small ( employers often offer to match employee deferrals as an incentive for employees to participate ). Thus , in the long run , 401 ( k ) plans tend to be relatively inexpensive for the employer .
If you don ' t have any employees ( or your spouse is your only employee ) an " individual " or " solo " 401 ( k ) plan may be especially attractive .
Note : A 401 ( k ) plan can let employees designate all or part of their elective deferrals as Roth 401 ( k ) contributions . Roth 401 ( k ) contributions are made on an after-tax basis , just like Roth IRA contributions .
Note : 401 ( k ) plans are generally established as part of a profit-sharing plan .
Money purchase pension plans
Money purchase pension plans are similar to profit-sharing plans , but employers are required to make an annual contribution . Participants receive their respective share according to the plan document ' s formula .
Defined benefit plans
By far the most sophisticated type of retirement plan , a defined benefit program sets out a formula that defines how much each participant will receive annually after retirement if he or she works until retirement age . This is generally stated as a percentage of pay , and can be as much as 100 percent of final average pay at retirement .
SIMPLE IRA retirement plans
SIMPLE plans work much like 401 ( k ) plans , but do not have all the testing requirements . So , they ' re cheaper to maintain . There are several drawbacks , however . SIMPLE plans cannot be utilized by employers with more than 100 employees .
Other plans
The above sections are not exhaustive , but represent the most popular plans in use today . Recent tax law changes have given retirement plan professionals new and creative ways to write plan formulas and combine different types of plans , in order to maximize contributions and benefits for higher paid employees .
Finding a plan that ' s right for you
If you are considering a retirement plan for your business , ask a plan professional to help you determine what works best for you and your business needs . The rules regarding employersponsored retirement plans are very complex and easy to misinterpret . In addition , even after you ' ve decided on a specific type of plan , you will often have a number of options in terms of how the plan is designed and operated . These options can have a significant and direct impact on the number of employees that have to be covered , the amount of contributions that have to be made , and the way those contributions are allocated ( for example , the amount that is allocated to you , as an owner ).