Published December 2004

Retirement plans
for small-business owners

If you’re a Snohomish County small-business owner, you’re absorbed in the “here and now.” But you still must think about life after your working years — which is why having the right retirement plan for your business is so important.

Fortunately, you can choose from a variety of quality retirement plans. These plans typically offer three key features:

• Tax-deferred earnings — When you invest in a “tax qualified” retirement plan, you’ll pay no taxes on your earnings until you start taking withdrawals.
• Pre-tax contributions — You generally put in pre-tax dollars to your retirement plan, so your contributions may lower your adjusted gross income.
• Variety of investment options — You can fund your retirement plan with an array of investments: stocks, bonds, mutual funds and more.

Now, let’s look at some popular types of small-business retirement plans:

If you have no employees
If your business has no employees except your spouse, you may want to choose from among these plans:

• SEP IRA — With a SEP IRA, you can contribute up to 25 percent of your compensation into the plan, up to a maximum of $41,000.
• Owner-only 401(k) — If you have an owner-only 401(k), you can put up to 25 percent of your compensation plus $14,000 (in 2005). If you’re 50 or older, you can add an additional $4,000 in “catch up” contributions. (However, you can’t contribute more than $41,000 per year if you’re under age 50, or $44,000 annually if you’re 50 or older.) Owner-only 401(k) plans also can permit larger contributions if your spouse works for the business.
• Owner-only defined benefit — This plan may be appropriate for you if you earn more than $100,000 annually from your business, you are over age 40, you can commit to contribute for at least three years and you desire much larger contributions than possible with the SEP IRA or the owner-only 401(k).

If you have employees
If you have employees, you may want to consider one of these plans:

• SIMPLE IRA — A SIMPLE IRA is easy to set up and inexpensive to administer. In 2005, you and each of your employees can contribute up to $10,000 to a SIMPLE IRA (or $12,500 if age 50 or over). Your business is generally required to match both your and your employees’ contributions, dollar for dollar, up to 3 percent of their salary, unless you decide to put in 2 percent of each eligible employee’s compensation.
• Safe Harbor 401(k) — A Safe Harbor 401(k) offers the same features of a traditional 401(k), but the amount you can defer from your salary is not limited to whether your employees contribute or not. You, as the business owner, benefit because you can contribute up to the annual maximum ($14,000 in 2005 or $18,000 if you’re 50 or older), regardless of how much your employees contribute.
• Safe Harbor 401(k) with age-enhanced profit sharing — Your business can make additional profit-sharing contributions to a Safe Harbor 401(k) plan. If you are older than most of your employees, you can structure your plan so that the contributions going to your account, and to those of your key employees, are much higher than the percentage going to most employees.

Pick the plan that fits
Before choosing a retirement plan for your business, meet with your tax adviser and your investment representative. Conditions in Snohomish County are improving, so if you haven’t already, now is the time to get educated, put a plan in place and get it moving. Take the time to do that — today.

Eric Cumley is a Certified Financial Planner and investment representative with Edward Jones in south Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 9,000 offices nationwide.

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