Morgan Hill Today 2014 03 Spring | Page 56

FINANCIALLY

Speaking

Business Owners

Don ’ t neglect your own retirement plan

by Daniel T . Newquist , CFP ®, AIF ®
Daniel T . Newquist , CFP ®, AIF ® is a Principal Wealth Advisor with RNP Advisory Services , Inc ., in Morgan Hill with over 17 years experience advising clients on their personal wealth , retirement planning , insurance , and business planning needs . Born and raised in Morgan Hill , Dan is available for private consultations and speaking engagements . Investment advisory services offered through RNP Advisory Services , Inc . – a registered investment advisor . Securities offered through Foothill Securities , Inc ., member FINRA / SIPC , an unaffiliated company . Visit his website at www . RNPadvisory . com or call 408-779-0699 .

If you ’ re like many small business owners , you pour your heart , soul , time , and nearly everything else into your business . When it comes to retirement planning , your strategy might be crossing your fingers and hoping your business will provide the nest egg you ’ ll need to live comfortably . But relying on a business to fund retirement can be a very risky proposition . What if you become ill and have to sell it early ? Or what if your business experiences setbacks just before your planned retirement date ?

Rather than counting on your business to define your retirement lifestyle , consider managing your risk now by investing in a taxadvantaged retirement account . Employersponsored retirement plans offer a number of potential benefits , including current tax deductions for the business and tax-deferred growth and / or tax-free retirement income for youremployees . For your business , the benefits of offering a well-designed retirement plan are immeasurable . There are several options to consider .
IRA TYPE PLANS Unlike “ qualified ” plans that must comply with specific Internal Revenue Code regulations and the Employee Retirement Income Security Act of 1974 ( ERISA ), these plans are less complicated and typically less costly .
SEP-IRA A SEP allows you to set up an IRA for yourself and for each of your eligible employees . Although you contribute the same percentage of pay for every employee , you ’ re not required to make contributions every year . Therefore , you can time your contributions according to what makes sense for the business . For 2014 , total contributions ( both employer and employee ) are limited to 25 % of pay up to a maximum of $ 52,000 for each employee ( including yourself ).
401 ( k ) PLAN Perhaps the most popular type of retirement plan offered by employers , a 401 ( k ) plan allows employees to make both pre- and after-tax ( Roth ) contributions . Pretax contributions grow on a tax-deferred basis , while qualified withdrawals from a Roth account are tax free . Employee contributions cannot exceed $ 17,500 in 2014 ($ 23,000 for those 50 and older ) or 100 % of compensation , and employers can choose to match a portion of employee contributions . These plans must pass tests to ensure they are nondiscriminatory ; however , employers can avoid the testing requirements by adopting a “ safe harbor ” provision that requires a set matching contribution based on one of two formulas .
PROFIT-SHARING PLAN Typically , only the business contributes to a profitsharing plan . Contributions are discretionary ( although they must be “ substantial and recurring ”) and are placed into separate accounts for each employee according to an established allocation formula . There ’ s no fixed amount requirement , and in years when profitability is particularly tight , you generally need not contribute at all .
SIMPLE IRA The SIMPLE IRA allows employees to contribute up to $ 12,000 in 2014 on a pretax basis . Employees age 50 and older may contribute an additional $ 2,500 . As the employer , you must either match your employees ’ contributions dollar for dollar up to 3 % of compensation , or make a fixed contribution of 2 % of compensation for every eligible employee . ( The 3 % contribution can be reduced to 1 % in any two of five years .)
QUALIFIED PLANS Although these types of plans have more stringent regulatory requirements , they offer more control and flexibility . Special rules may apply to selfemployed individuals .
DEFINED BENEFIT ( DB ) PLAN Commonly known as a traditional pension plan , DB plans are becoming increasingly scarce and are uncommon among small businesses due to costs and complexities . They promise to pay employees a set level of benefits during retirement , based on a formula typically expressed as a percentage of income . DB plans generally require an actuary ’ s expertise .
Total contributions to profit-sharing and 401 ( k ) plans cannot exceed $ 52,000 or 100 % of compensation in 2014 .
SELF-EMPLOYED PLANS In addition to the options noted above , sole business owners may consider an individual or “ solo ” 401 ( k ) plan . These types of plans are very similar to a standard 401 ( k ) plan , but because they apply only to the business owner and his or her spouse , the regulatory requirements are not as stringent . They can also have a profit-sharing feature , which can help you maximize your tax-advantaged savings potential .
BOTTOM LINE : As a business owner , who has an employer-sponsored retirement plan , and a financial advisor who specializes in designing and managing such plans , I know first-hand that the benefits far outweigh the complexities .
This article is intended for educational purposes only . It is not intended as investment advice . Always consult your financial or tax-planning professional for guidance with respect to your specific situation .
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