Starting a retirement savings plan can be easier than most business owners think. What’s more, there are a number of retirement programs that provide tax advantages to both employers and employees.
Experts estimate that Americans will need 70 to 90 percent of their preretirement income to maintain their current standard of living when they stop working. So now is the time to look into retirement plan programs. As an employer, you have an important role in helping America’s workers save.
By starting a retirement savings plan, you will help your employees save for the future. Retirement plans may also help you attract and retain qualified employees, and they offer tax savings to your business. You will help secure your own retirement as well. You can establish a plan even if you are self-employed.
Any Tax Advantages?
A retirement plan has significant tax advantages:
• Employer contributions are deductible from the employer’s income,
• Employee contributions (other than Roth contributions) are not taxed until distributed to the employee, and
• Money in the plan grows tax-free. Any Other Incentives? In addition to helping your business, your employees, and yourself, it’s easy to establish a retirement plan, and there are additional 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 age 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 retirement 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; and
• 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 59 1/2 from Roth accounts held for 5 years, including earnings, are generally tax-free.
Five Reasons to Start a Retirement Plan:
1. Greater Security – The sooner you start a plan, the more financially secure you and your employees can be in later years. Even small contributions can make a big difference over time.
2. Lower Taxes – Contributions are usually tax-deductible. You may even get a tax credit for starting a plan.
3. Grow More – Retirement savings grow faster in a plan thanks to tax-free compounding.
4. Reduce Employee Turnover – A plan helps to attract and keep good employees.
5. Many Low-Cost Choices – There is a retirement plan for every business.
www.dol.gov/ebsa</i>. Department of Labor / IRS, Dec. 2014. Web. https://www.irs.gov/pub/irs-tege/savings_retirement.pdf