Here's
an overview of the retirement plan landscape.
provided by Gregory M. Montagna, CPA, CFP
All retirement plans are not the same. In fact, there is such a wide variety of retirement
plans that it is worth it to read up on your choices. Here's a brief look at
the different plans and what they have to offer.
The Traditional 401(k). Most people have such a retirement savings
plan, and it works like this. The plan is funded with pre-tax dollars taken out
of your paycheck (through payroll deductions). If you're lucky, your company
will match your level of contribution or even make contributions on your behalf - after all, the employer contributions are tax-deductible.
The I.R.S. will
currently let you put up to $16,500 a year in a Traditional 401(k); COLA
adjustments may drive that limit higher in the future. The I.R.S. also allows catch-up
contributions (additional contributions from those aged 50+), with a current
annual limit of $5,500.
In 2010, the total amount put into a 401(k) by you and your employer can't
exceed $49,000.1
There are several variations on the
traditional 401(k) theme …
The Safe Harbor 401(k). A byproduct of the Small Business Job
Protection Act of 1996,the Safe
Harbor plan combines the best features of the traditional 401(k) and a SIMPLE
IRA, making it very attractive to a business owner. With a Safe Harbor plan, an
owner-operator can avoid the big administrative expenses of a traditional 401(k) and
enjoy higher contribution limits. The
Safe Harbor plan allows for employers to make matching or non-elective
contributions. Typically, employers match contributions dollar-for-dollar up to
3% of an employee's income.2
The SIMPLE 401(k). Designed forsmall business owners who don't want to deal with retirement plan
administration or non-discrimination tests, the SIMPLE 401(k) is available for
businesses with less than 100 employees. Like
a Safe Harbor plan, the business owner must make fully vested contributions (up
to 3% of an employee's income). But the maximum pretax employee contribution to
a SIMPLE 401(k) is $11,500, and employees with a SIMPLE 401(k) can't have
another retirement plan with that company.2
The Solo 401(k). Combine a profit-sharing plan with a regular
401(k), and you have the Solo 401(k) plan, a retirement savings vehicle
designed for sole proprietors with no employees other than their spouses. These
plans currently permit you to contribute up to $49,000 annually plus $5,500 in catch-up contributions
for a total of $54,500 if you are 50 or older.3
The Roth 401(k). Imagine a Traditional 401(k) fused with a
Roth IRA. Here's the big difference: you contribute after-tax income to a Roth
401(k), and when you reach age 59½, your withdrawals will be tax-free (provided
you've had your plan for more than five years). The annual contribution limits
are the same as those for a Traditional 401(k) plan.4
You can roll Roth
401(k) assets into a Roth IRA when you retire - and you don't have to make
mandatory withdrawals from a Roth IRA when you turn 70½. With a standard
401(k), you have to roll over the
assets to a traditional IRA and make the required withdrawals.4
The
DB(k). The DB(k) is
a defined benefit retirement plan with some of the features of a 401(k).
Companies with fewer than 500 employees are starting to put them into place.
They offer plan participants a retirement savings plan with the potential for a
small income stream in the future, mimicking the pensions of years past. The
pension income equals either a) 1% of final average pay times the number of
years of service, or b) 20% of that worker's average salary during his or her
five consecutive highest-earning years.5,6
And then there are
SEP-IRA, SIMPLE IRA and Keogh plans …
The
SEP-IRA. This employer-funded
plan gives businesses a simplified vehicle to make contributions toward workers'
retirements (and optionally, their own). The employer contributions are 100%
vested from the start, and the employer can supplement the SEP-IRA with another
retirement plan. In 2010, these plans have a $49,000 maximum contribution
limit, and an individual's personal contribution limit depends on such factors
as service, performance, and salary. These plans don't permit catch-up
contributions.3,7
The
SIMPLE IRA. This is
like a SIMPLE 401(k) - a small business retirement plan with mandatory employer
and optional employee contributions and a current $11,500 annual contribution
cap. But in this plan, there is one big difference for the business owner. If
the business is not doing well, the owner can reduce plan contributions. The
employer contributions are still 100% vested from the beginning, and $2,500
catch-up contributions are currently allowed for employees 50 and older.3,8
The
Keogh Plan. The
Keogh is designed for small unincorporated businesses. There are defined
benefit, money purchase and profit-sharing variations; the defined benefit
variation is a qualified pension plan offering a fixed benefit amount. In 2010,
the annual contribution limit for a profit-sharing Keogh is $49,000.9
Did
you know you had so many choices? If
you are an employer, you may not have realized you have such an array of
choices in retirement plans. But you do, and asking the right questions may
represent the first step toward implementing the right plan for your future or
your company. Be sure to ask a qualified financial advisor or business
retirement plan consultant about your options today.
Gregory M. Montagna, CPA, CFP is a
Representative with 1st Global Advisors and may be reached at www.montagnainc.com,
(949) 833-2371 or greg@montagnainc.com.
These are the
views of Peter Montoya Inc., not the named Representative nor Broker/Dealer,
and should not be construed as investment advice. Neither the named
Representative nor Broker/Dealer gives tax or legal advice. All information is
believed to be from reliable sources; however, we make no representation as to
its completeness or accuracy. The publisher is not engaged in rendering legal,
accounting or other professional services. If other expert assistance is
needed, the reader is advised to engage the services of a competent
professional. Please consult your Financial Advisor for further information. www.montoyaregistry.com www.petermontoya.com
