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Retirement Planning and Simple Retirement Plans

You are probably so busy running your business that it’s difficult to take time out to plan for retirement. As a financial planner, I advise clients that they will need up to 70% of their preretirement income to have a comfortable retirement.  Clients should realize that only a small portion of that retirement money will come from Social Security. Retirement planning is a part of financial planning. Choosing the right retirement plan for a business or individual can be complicated and an experienced financial planner should have the expertise to guide you. We at RJR Financial Firm are experts in the field of retirement planning and asset management.

One of the best retirement plans I recommend for small business is a SIMPLE PLAN. A SIMPLE IRA Plan is a salary reduction retirement plan. That means that participants decide how much they want to save for retirement-and that amount is deducted from their salary on a pretax basis each pay period. It is a cost-effective plan designed specifically for companies with 100 or fewer employees.  One of the biggest advantages of a SIMPLE IRA Plan is that enables all participants to save for retirement while also saving on current taxes. In addition to reducing current taxable income, a SIMPLE IRA Plan

  • Helps retain and attract valuable employees
  • Allows employees to save for their retirement
  • Allows contributions to grow tax free
  • Employer contributions are tax deductable
  • RJR Financial Firm is a money management and asset management firm that will manage the employee’s investment accounts

From the employer’s side, this type of plan is cost effective administratively and requires a much lower employee matching requirements from other plans. Each employee will have their own IRA account in which to contribute in order to shelter income from taxes and build a retirement fund. Instead of employees who are not experts in asset management, determine what to invest their money in, We as expert asset management and money management firm will provide that service.

Under a Simple plan, any employee with compensation of at least $5,000 in compensation must be permitted to enter a “qualified salary reduction arrangement.” Under this arrangement, an employee can elect to have a percentage of compensation not in excess of $11,500 (in 2010) set aside in an IRA, instead of receiving it in cash. This maximum is indexed for inflation each year.

Amounts taken out of the employee’s salary and contributed to a Simple IRA are not taxed to the employee until withdrawn from the plan. Early withdrawals may be subject to a 10% penalty (25%, if the withdrawal is made within the first two years).

Under a qualified salary reduction arrangement, the employer must make “matching” contributions to the SIMPLE IRA. That is, the employer must make contributions to an employee’s SIMPLE IRA in the same amount that the employer contributed under the employee’s salary reduction election, up to 3% of the employee’s compensation. For example, if an employee with compensation of $50,000 elects to have 10% of his pay contributed to the plan ($5,000), the employer must contribute an additional $1,500 (3% of $50,000). For these purposes, an employee’s compensation is the amount reported on his Form W-2, plus the amount of elective deferrals (e.g., the amount of the salary reduction contributed to the SIMPLE IRA). But the matching contribution for the year cannot exceed $11,500 in 2010. This amount is indexed for inflation each year.

If an employer wishes to contribute less than 3%, he can give employees proper notice and drop the contribution to as low as 1% of compensation, as long as this isn’t done for more than two years out of the five-year period ending with the year of reduced contributions.

Alternatively, instead of making “matching” employee contributions, the employer can simply contribute a flat 2% of “compensation” (limited to $245,000 for 2010, and as adjusted for inflation in following years), for every employee eligible to participate in the plan, whether the employee elects to reduce his salary or not. Special notice must be given to employees if the employer wishes to take this approach.

Instead of adopting a SIMPLE plan, an employer can set up a SIMPLE 401(k) plan. By making matching contributions (or 2% non-elective contributions) and satisfying rules similar to those for simple plans, SIMPLE 401(k) plans will be considered to satisfy the otherwise complex nondiscrimination test for 401(k) plans. The contribution rules for SIMPLE plan apply to Simple 401(k) plans, except that if an employer adopts the matching contribution approach (instead of the flat 2% option), the maximum contribution percentage cannot be dropped below 3%. Unlike a SIMPLE plan, a Simple 401(k) plan is part of a qualified plan, and is subject to the qualified plan rules. Contributions to Simple 401(k) plan are not subject to the 15 percent limits on contributions to profit-sharing or stock bonus plans.

SIMPLE plan have the advantages of simplified reporting requirements and the absence of the qualification rules prohibiting the plan from discriminating against lower-level employees. These advantages come with some obligations, such as the matching contribution requirement. Additionally, to be eligible to adopt a SIMPLE plan, an employer must not contribute to, or accrue benefits under, any qualified retirement plan for services provided during the year (or in any year after the qualified salary reduction arrangement takes effect).

This maybe a good time to reassess your retirement planning for yourself and your business.  Please call , Robert Richter at RJR Financial Firm if you wish to discuss this topic further.