Should you still have a 401k Plan?

Should you still have a 401k Plan?

There are few better ways to get a holiday party kick-started then to get everyone talking about their retirement plan. “Retirement plan” almost automatically makes people think “401k”. But unless a business has over 25 employees, the vast expense and complicated testing requirements of the traditional 401k plan might be more trouble than they’re worth. Make yourself the hit of your next “Ugly Sweater” party by familiarizing yourself with these retirement plan alternatives:

SIMPLE IRA

The SIMPLE IRA is the retirement plan that fits the bill for many of Rhode Island’s small businesses with 25 or fewer employees. There is a matching requirement (1 to 3% of employee contributions), but most custodians have no charge for holding the plan assets. There are no testing requirements – owners and employees simply put money away on their own behalf and the company matches a percentage. For 2010, contributors were able to put away $11,500, plus another $2,500 if they’re over age 50.

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Businesses that should consider: Law firms, Plumbing Companies, Real Estate brokers

SEP IRA 

The SEP IRA also avoids the complication and expense of the 401k, and may allow you to put more money away than the SIMPLE IRA. The SEP is ideal for husband-wife companies or for small businesses that want to reward faithful employees. This plan is entirely employer-funded (no employee contributions) and the business owner is not required to make a yearly contribution.

Businesses that should consider: Accounting firms, Mom and Pop Shops
 


Defined Benefit Plans

That’s right. The defined benefit plan does still exist. The DB plan allows for the maximum amount of money to be set aside for the employer. The participant’s annual retirement benefit is determined by a benefit formula (actuary required!) The maximum annually benefit at retirement is the lesser of $195,000 or 100% of highest 3 consecutive earning years. As you can imagine, this is the most cumbersome plan to maintain, but it also provides the highest benefit for high income business owners within 15 years of retirement.

Businesses that should consider: Sole practitioner doctors and attorneys

The IRS provides a very helpful Web site to navigate the various retirement plan choices at www.retirementplans.irs.gov

Dan Forbes is a regular contributor on business financial issues. He leads the firm Forbes Financial Planning and can be reached at [email protected]