Compare Retirement Plans

 

There are a variety of retirement plan options available to you as an individual, self-employed business owner, small business, or corporation.  It is important to understand the differences of the plan types so you can choose the program that meets your objectives for contribution levels, ease of administration, costs, workforce, and long-term business strategy.

2008 Contribution Limits - click here to view

 

 

Solo or Individual 401(k)

A plan designed specifically for owner-only businesses that employ a spouse or the owner's immediate family members and has no plans to hire any non-family full time employees.  It is also designed for businesses with part-time employees who are not eligible(less than 1,000 hours of work per year) to participate in the plan. (Part-time family members can be added as a participant in your plan).  If your business fits this description - whether it's a corporation, partnership, sole proprietorship or nonprofit entity - the solo 401(k) may be for you.

Key Benefits

  • Employer can make a tax-deductible contribution of up to 25% of compensation(approx. 20% for sole proprietors due to self-employement deduction) plus as much as another $15,500 in salary deferrals (plus another $5000 if age 50 or older).  Total contributions cannot exceed the lesser of 100% of compensation or $46,000 for 2008
  • Availability of loans and hardship withdrawals
  • No top-heavy and discrimination testing required

     

Possible Drawbacks

  • All contributions are immediately 100% vested
  • May require filing of IRS Form 5500 if assets exceed $250,000

Simple IRA

Simple IRAs are ideal for business owners with 100 or fewer workers who would like their employees to share responsibility for their own retirement savings, but who don't want the complexity, cost and administration of a 401(k).

Since annual employer contributions are mandatory, you should be in a position to make an ongoing financial commitment to the plan

Key Benefits

  • Very simple to administer; no discrimination testing or government reporting is required
  • Allows employees to make annual pretax, salary-deferral contributions of up to $14,000 or 100% of income, whichever is less.  In addition, catch-up contributions limited to $4,000 may be made by participants age 50 and over
  • Individual employees can defer the maximum amount, regardless of amounts deferred by other employees

     

Possible Drawbacks

  • Employer contributions are mandatory and must use a plan formula ranging from a 2% contribution to your employees or a 3% matching contribution (which can be reduced to 1% every two out of five years).
  • Can't be paired with other qualified plans - must be the employer's exclusive plan
  • All contributions are 100% immediately vested
  • High premature withdrawal penalty of 25% in first two years of participation
  • Loans are not permitted
  • Overall, the maximum annual contribution is low when compared to other plans.

     

SEP

SEPs are ideal if you're a self-employed individual or small business owner who wants a simple, easy-to-administer plan that allows you to make annual discretionary tax-deductible contributions to a retirement plan.  Employers are permitted to make tax-deductible contributions of 25% of compensation(approx. 20% for sole proprietors due to self-employment deduction) paid during the year to the participants under the plan.  The overall maximum contribution per eligible employee is 100% of compensation, not to exceed $46,000 based on the first $230,000 of compensation.  SEPs are ideal for independent contractors, part-timers, and individuals who earn any self-employment income from activities outside of their full-time jobs.

Key Benefits

  • Annual contribution percentages may vary; contributions may even be skipped altogether
  • Simple to establish and maintain; no government reporting

Possible Drawbacks

  • In general, the same percentage of compensation must be contributed for all participants
  • Involves top-heavy testing
  • Generally difficult to exclude part-timers from eligibility
  • Loans are not permitted

Traditional 401(k)

The 401(k) is designed for businesses of all sizes that wish to have their employees share responsibility for retirement savings.  With features such as availability of loans and hardship withdrawals, the 401(k) is one of the most flexible retirement plans available.  As a result of these extra features, 401(k)s require more administration than do other plans.

Key Benefits

  • Allows employees to make annual pretax, salary-deferral contributions of up to $15,500. In addition there are catch-up provisions for those age 50 or older
  • Employer-matching contributions (optional).  Maximum tax-deductible employer contribution is 25% of the compensation paid during the year to the participants under the plan.  Overall maximum contribution per eligible employee is 100% of compensation, not to exceed $46,000 based on the first $230,000.
  • Vesting schedule available
  • Part-time and seasonal workers can possibly be excluded on the basis of eligibility requirements
  • Matching contributions can be used toward satisfying top-heavy test

     

Possible Drawbacks

  • Higher cost than other plan
  • Requires filing of IRS Form 5500
  • Nondiscrimination and top-heavy testing required

Profit-Sharing

If you like the features of a SEP, but want more control over your plan's eligibility and vesting, a Profit-sharing plan may be a better option.  Although a Profit-sharing plan offers you control, it entails additional administrative responsibilities.  Profit sharing plans are suitable for business with unpredictable earnings as well as those with part-time employees and/or high employee turnover.

Key Benefits

  • Annual contribution percentage may vary; contributions may even be skipped altogether.  Employer is allowed to make a tax-deductible contribution of 25% of the compensation paid during the year to the participants under the plan.  The overall maximum contribution per eligible employee is 100% of compensation not to exceed $46,000 based on the first $230,000 of compensation
  • Part-time and seasonal workers may possibly be excluded on the basis of eligibility requirements
  • Availability of vesting schedules
  • Availability of loans and hardship withdrawals

Possible Drawbacks

  • In general, if the employer chooses to make a contribution to the plan, the same percentage of compensation must be contributed for all participants
  • Involves moderate administration and is subject to ERISA reporting requirements

     

IRA - and Rollover IRAs

The IRA and Roth IRA are excellent individual retirement savigns programs. Contributions may be tax deductible (if individual falls within income guidelines).  Annual contributions of up to $5,000 or 100% of compensation, whichever is less; Catch-up contributions of $1,000 if age is 50 or older. Non-employed spouses may also contribute up to $5,000 per year if certain conditions are met. 

Roth IRA plans provide for non-deductible contributions.  Roth IRAs provide tax-free distributions provided certain conditions are met; no minimum distributions required at 70 1/2 with a Roth.

Key Benefits

  • You need a low cost plan that is available to accept a rollover and are not sure of your future company needs. 
  • You have a rollover and you cannot qualify for an Individual 401(k) plan because you currently are a W-2 employee for another company.

     

Possible Drawbacks

  • Traditional IRA has minimum distribution requirements at age 70 1/2
  • Distributions taken prior to age 59 1/2 may be subject to a 10% penalty
  • No loan provision; withdrawals allowed with certain provisions 
  • Contribution deductibility may be restricted depending on income and filing status

Solo or Single DB (Defined Benefit)

You qualify for an Individual 401(k) plan and have hit the maximum deferral limits and need to have an additional option to contribute more for your retirement and tax benefits.  Or, do you have a successful small business?  Or a secondary source of significant income?  A spouse whose earnings you can affford to sock away?  If you're a baby boomer (over age 40) who fits any of these descriptions, this may be option to consider.   Please ask an advisor at Ward Aguilar Financial, Inc. about the key benefits and drawbacks as this is a more complicated plan.

 

Contact us for Program Options.  Or, please feel free to contact us if you have any questions on which plan is right for you at 1-866-703-2131 toll free.