RETIREMENT OPTIONS

A.SEP IRA:

Eligibility:

  • Anyone who is Self Employed
  • Any Employed Person with Free lance Income
  • Any Business owner (Sole Prop, Partnership, LLC, C & S Corp)
  • Has to be 21 years old.
  • Has worked for you in 3 of the last 5 years.
  • Has received 550$ in wages for 2010.

    • Tax Deductible Contributions:
  • Up to 25% of compensation by employer (W-2 wages), as much as $49,000 for the 2010 plan year.
  • 20% of Self Employment Income – same limit.
  • % has to be same for all employees
  • Contributions can be deducted in 1020 for Corporations, 1020S for S-Corp, 1065
  • After age 59.5yrs – Taxes (Income tax rate) due on earnings and contributions.
  • Deadline to open and/or contribute:
  • Tax filing deadline or April 15th for most.

    • Contribution Flexibility:
  • No need for annual contributions.
  • Annual % amount of contribution (0-25%) can be changed every year.
  • Annual % amount of contribution (0-25%) can be changed every year.
  • All contributions made by employer.
  • Generally same percentage (based on W-2 wages) is contributed to employees and employer.

    • Other Benefits:
  • No complicated forms to fill out except 1 page Form 5305-SEP.
  • Form 5305-SEP has to be given to all eligible employees every year especially if there is a change.
  • No annual reporting requirements to IRS.
  • Attractive Benefits to attract and retain employees.
  • Excess contribution (over 25% of wages or 49,000$ whichever is less) can be designated as income for employee or adjusted for future years contribution.

    • SIMPLE IRA:

    Eligibility:
  • Any Self Employed person who does not have any other retirement plans.
  • Employers with 100 employees or fewer with no other retirement plans.
  • (Sole Prop, LLC, Partnerships, C & S Corp)
  • Employer and employees have to earn at least 5000$ in the preceding and current year.

    • Tax Deductible Contributions:
  • Employer can save taxes by deducting any contributions made to eligible employees from their business expenses.
  • Employees can direct part of their salary into SIMPLE IRA, thus reducing their pre-tax income.
  • Tax deferred growth until withdrawn.
  • 11,500$ in 100% salary contributions in 2010. 14,000$ if employee is 50 or older.
  • Employers can either match up to 3% of salary but can reduce match to 1% for any 2 years in a 5 years period. Limits apply.

    • SOLO 401K:

    Eligibility:
  • Anyone who is Self Employed or business owners (Sole Prop, LLC, Partnership, C & S Corp) with no employees other than a spouse.

    • Tax Deductible Contributions:
  • Employee contributions of as much as $16,500 for the 2010 plan year and another 5000$ if age 50 and higher.
  • The plan also lets employer profit sharing contributions up to 25% of compensation up to $49,000 for the 2010 plan year.
  • 5000$ more if age 50years or more.
  • Note: Total employee & employer contribution cannot exceed 49k.
  • Tax deferred growth until withdrawn.
  • Withdrawals:Before age 59.5yrs – 10% early withdrawal penalty plus taxes.
  • Exceptions may apply.
  • After age 59.5yrs – Taxes (Income tax rate) due on earnings and contributions.
  • Deadline to open and/or contribute:December 31st or end of current fiscal year.

    • Contribution Flexibility:
  • All amounts are vested immediately
  • Each participant has own account and can invest accordingly.

    • Other Benefits:
  • Form 5500 to be submitted to IRS once plan assets exceed 100000$.
  • Pre-tax contribution amount is much larger than SEP or Simple IRA.
  • Attractive Benefits to attract and retain employees.
  • Custodian can sometimes charge money to maintain account(300$ - 500$) per employer.

    • 4. 401K:

  • This plan is suitable for private or public businesses (C/ S Corp, LLC) with 25 or more employees.

    • Eligibility:
  • Any employee can be eligible right after joining the firm or a waiting period of 6 months to 1 year.

    • Tax Deductible Contributions:
  • Employee contributions of as much as $16,500 for the 2010 plan year and another 5000$ if age 50 and higher.
  • The plan also lets combined employer and employee contributions up to $49,000 for the 2010 plan year.
  • 5000$ more for those age 50 and higher.
  • Tax deferred growth until withdrawn.

    • Withdrawals:
  • Before age 59.5yrs – 10% early withdrawal penalty plus taxes.
  • Exceptions may apply.
  • After age 59.5yrs – Taxes (Income tax rate) due on earnings and contributions.
  • Deadline to open and/or contribute: December 31st or end of current fiscal year.

    • Contribution Flexibility:
  • All amounts are vested immediately.
    Each participant has own account and can invest accordingly.

    • Other Benefits:
  • Retain valuable employees by providing retirement benefits.
  • Attract employees who will otherwise join bigger companies or competitors who offer better benefit options.

    • Contribution Flexibility:
  • All amounts are vested immediately.
  • Each participant has own account and can invest accordingly.
  • Provide matching benefits to make the 401k even better.
  • Immediate vesting of all contributions and match.
  • Tax benefits for the employer.
  • Uncle Sam gives you an extra tax free compounding of your money versus the compounding in your after tax accounts, assuming tax rates remain the same.
  • Hardship withdrawals possible.
  • More plan features, investment options, and flexibility compared to a Simple IRA.

    • Special Notes:
  • Borrowing from 401k is possible – but it impacts your retirement and the money need to be returned immediately, should you switch jobs or get laid off or retire.
  • Otherwise, penalty and taxes imposed.
  • You may be charged a load to buy mutual funds.
  • Other fees may include 12b-1 fees, transaction fees, record keeping fees – especially for a small business employer 401k, these costs may diminish the benefits of the plan.
  • Watch out for tax advantaged instruments inside a 401k plan.
  • IRS and administration requirements and expenses.
  • Usually, employers pay the 401k administrative and setup costs.