Financial Planning
| Choosing the right retirement plan for your business |
| Published Wednesday, July 2, 2008 8:00 am |
by Roger Kalina
Defined benefit, defined contribution, non-qualified deferred compensation:
which type of plan is right for your business?
Several options are open to a small business owner who wants to start a company retirement program. Each has advantages and disadvantages. Selecting the best-suited plan is a matter of considering funding costs, tax consequences, administrative requirements and, of course, the needs of your company and employees.
A qualified or tax-qualified plan is one in which contributions are tax-deductible and there's no tax on income earned by the plan's assets until the employee begins receiving payments. A qualified plan can be a defined benefit or a defined contribution plan.
Defined Benefit Plans
A defined benefit plan is one in which the amount the participant will receive upon retirement is set (defined) by a formula. The formula usually is derived from the retiree's length of service and average pay over the last several years of employment. A common form of defined benefit plan is the traditional company pension that pays retirees a guaranteed sum for life. Defined benefit plans can be expensive and administratively complex, so they are generally used in limited cases, such as when an owner is nearing retirement and needs to make large contributions.
Defined Contribution Plans
A defined contribution plan is more common. The amount of the employer/employee contribution is set (defined) at a particular level, for example, as a percentage of compensation. The employer bears no responsibility for the performance of the product funding the plan.
Defined contribution plans include profit-sharing, 401(k) plans, Owners 401(k), SEP-IRA and others. Generally, qualified retirement plans must be available to all full-time and certain part-time employees. The amount of annual contributions are limited by law.
Non-qualified Deferred Compensation Plans
Non-qualified deferred compensation plans are those that a business offers to only certain employees-usually the owners and other highly-compensated employees. The contributions to such plans are not tax-deductible in the year they are made. However, depending on the plan type, interest that accrues in these types of plans may be tax-deferred.
As with other important financial decisions, selecting the suitable retirement program for your business requires careful examination of all options. This article is intended only to touch briefly on some of the options available to small business owners and self-employed people. You should consult appropriate professionals (tax advisors or other financial and legal advisors) before deciding what's best for you and your business.
A little planning today can make a world of difference tomorrow.
Benchmark FInancial Group, LLC does not provide legal or tax advice.
Please consult your tax or legal advisor regarding your individual situation.
Roger Kalina, CFP®, ChFC, CLU is the founder of Benchmark Financial Group. He has been in the financial services field for 15 years and primarily focuses on risk management and wealth transfer issues. Roger is a community leader and has been a Board member of The Haven, a local children's charity that helps abused and neglected boys, since 1998. Contact him directly at 561.416.2992 or via email at rkalina@benchmarkfinancial.info.
Benchmark Financial Group
2401 NW Boca Raton Blvd.
Boca Raton, FL 33431
CA Insurance License # 0B50632
GE-36223 (07/06)(Exp. 07/08)
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