As a small business owner, planning for retirement may be the last thing on your mind. Your day-to-day duties may keep you too busy to consider any time frame beyond 5 P.M. on Friday. You may also think that a company-sponsored retirement plan is out of your-and your employees'-reach right now. Put away your dreams of retiring on the proceeds when your company is acquired for a moment. Thanks to the passage of last year's Economic Growth and Tax Relief Reconciliation Act (EGTRRA), small businesses that were previously reluctant to start a company retirement plan now have very few excuses not to establish one-and can reap the benefits!
The benefits of a well-considered plan
Setting up a retirement plan program is not as expensive as you may think. There is tax benefits involved. Perhaps most important, a retirement plan is a low-cost way to keep the employees you have and to attract needed talent. In a small operation, generally defined as fewer than 100 employees, even one defection can be a tremendous setback.
You get a tax credit
Beginning this year, small business owners that set up a new retirement plan receive a $500 credit against the first $1,000 of their qualified startup costs for the plan's first three years. Consider that it typically costs a company with fewer than 50 employees less than $2,500 to set up a typical 401(k) plan, the decision makes even more sense. (Annual account maintenance fees, which are usually $25 per employee, can be passed on to them.)
You get a tax deduction
Under the EGTRRA, the tax deduction for employers making contributions to an employee retirement plan increases from 15 percent to 25 percent, and pretax salary deferrals are not included in this amount.
You can play catch up
The EGTRRA increases the amount of pretax earnings people can save in their retirement plans. Starting this year, that figure is $11,000, and it will increase $1,000 each year until 2006. At that point, the pretax allotment will be $15,000, and it will be indexed in $500 increments for inflation thereafter. Employees over age 50 are even allowed additional catch-up contributions of $500 per year if they have fallen behind on their retirement savings.
Unfortunately, time is, as they say, of the essence. Because Congress is afraid it might have given away the store to taxpayers and will potentially bankrupt the nation's coffers, the EGTRRA is set to sunset-or terminate-at the end of 2010, at which point the laws will revert to the pre-Act levels of 2001 if no further legislation is made.
Okay, but where do I begin?
The first step, of course, is to determine what retirement plan makes the most sense for your business. There are a host of plans to consider 401(k), 403(b), SIMPLE IRA, SEP and Keogh. Your insurance company, accountant, or financial advisor should be able to help you make a decision and set one up for you.
Invest in your future today
Certainly, you have a number of options to consider. Consider them soon, even if you think you're too busy to plan now. Investing in your employees' future is just as much an investment in your company, as employees will see that you are responsive to their needs. Just think of how much time you'll have on your hands during your retirement to regret not having been more proactive. The less you put away for retirement now, the longer you'll have to work to reach your goal. Wasn't having that freedom to do what you want one of the reasons you became your own boss to begin with?
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