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).