Saving for Retirement: Options for the Small Business Owner

Have you been thinking about starting a retirement program for your small business?  Do you already have one in place that is no longer meeting your needs?  In these tough economic times, many business owners are scrambling to manage their cash flow and still save for the future.
There are many types of retirement plans, but they typically fall into two categories: defined benefit and defined contribution.  A defined benefit plan, also known as a traditional pension plan, promises the participant a specified monthly income at retirement.  This type of plan requires professional assistance and actuarial calculations to determine the required contribution.  A big drawback to this type of plan is that when cash flow and profits are down, there is limited flexibility to change the amount required to be contributed each year.
A 401(k) is one type of defined contribution plan which can offer business owners flexibility and can be customized to your business needs more readily than a defined benefit plan.  With a 401(k) plan, an employee and/or business owner can make contributions from his or her paycheck either before or after-tax, depending on the options offered by the plan. The contributions go into a 401(k) account.  The employee typically chooses the investments based on options provided by the plan. Some plans also allow for employer contributions, such as matching the employee’s contributions up to a certain percentage.  Roth 401(k)’s are a relatively new feature that some employers are making available.
How much do you have to contribute annually to a 401(k)?  You don’t have to contribute anything if you don’t want to.  If you decide to make a contribution, the 2012 maximum is $17,000 if under age 50 and $22,500 for those 50 and over.  For an even higher annual limit, consider an employer match up to 25 percent of compensation for a maximum combined contribution of $50,000.
Considering a 401(k)?  Many large investment firms offer approved 401(k) plan templates.  For additional assistance, your CPA can help you understand your options and decide which plan is best for you.  Also, your CPA can review your accounting and tax return information to estimate the tax implications of your retirement plan choice.
Jerald Schneider is a Certified Public Accountant providing tax, accounting and financial advice for more than 25 years.  He can be reached at 661-297-1072 or by e-mail at jerald@jeraldschneider.com.