Choosing a Retirement Solution for your Small Business
Source: U.S. Department of Labor
a retirement savings plan can be easier than most business
owners think. A number of retirement programs provide tax
advantages to both employers and employees.
Experts estimate that Americans will need 70 to 90 percent of
their pre-retirement income to maintain their current standard of
living when they stop working. As an employer, you play an
important role in helping America's workers save, while you also
help to secure your own retirement, even if you are
In addition, retirement savings plans may also help you
attract and retain qualified employees, while providing these
tax savings to your business:*
• Employer contributions are deductible from the
• Employee contributions (other than Roth contributions) are
not taxed until distributed to the employee.
• Money in the plan grows tax-free.
Besides helping your business, your employees and yourself,
it is easy to establish a retirement plan, and there are several
more reasons for doing so:
• High contribution limits so you and your employees can
set aside large amounts for retirement.
• "Catch-up" rules that allow employees aged 50 and over to
set aside additional contributions. The "catch-up" amount
varies, depending on the type of plan.
• A tax credit for small employers that enables them to
claim a credit for part of the ordinary and necessary costs
of starting a SEP, SIMPLE, or certain other types of plans
(more on these later). The credit equals 50 percent of the
cost to set up and administer the plan, up to a maximum of
$500 per year for each of the first 3 years of the plan.
• A tax credit for certain low- and moderate-income
individuals (including self-employed) who make contributions
to their plans ("Saver's Credit"). The amount of the credit
is based on the contributions participants make and their
credit rate. The maximum contribution eligible for the
credit is $2,000. The credit rate can be as low as 10
percent or as high as 50 percent, depending on the
participant's adjusted gross income.
• A Roth program that can be added to a 401(k) plan to allow
participants to make after-tax contributions into separate
accounts, providing an additional way to save for
retirement. Distributions upon death or disability or after
age 59½ from Roth accounts held for 5 years, including
earnings, are generally tax-free.
A Few Retirement Facts. Most private-sector retirement
vehicles are either Individual Retirement Accounts (IRAs),
defined contribution plans, or defined benefit plans.
People tend to think of an IRA as something that individuals
establish on their own, but an employer can help its employees
set up and fund their IRAs. With an IRA, the amount that an
individual receives at retirement depends on the funding of the
IRA and the earnings (or losses) on those funds.
Defined contribution plans are employer-established plans
that do not promise a specific amount of benefit at retirement.
Instead, employees or their employer (or both) contribute to
employees' individual accounts under the plan, sometimes at a
set rate (such as 5 percent of salary annually). At retirement,
an employee receives the accumulated contributions plus earnings
(or minus losses) on the invested contributions.
Defined benefit plans, on the other hand, promise a specified
benefit at retirement, for example, $1,000 a month. The amount
of the benefit is often based on a set percentage of pay
multiplied by the number of years the employee worked for the
employer offering the plan. Employer contributions must be
sufficient to fund promised benefits.
Small businesses may choose to offer IRAs, defined
contribution plans, or defined benefit plans. Many financial
institutions, like Baylake Bank, offer one or more of these
retirement plans that have been pre-approved by the Internal
Revenue Service (IRS). For more information, contact a Baylake
Bank Financial Center near you.
*Consult your tax advisor.