Are you a business owner and your retirement savings isn’t what it should be? Or would you like to take more money out of your business with fewer taxes? One or both of the following strategies may be useful to you in taking more money out and building a larger retirement nest egg.
A SafeHarbor 401(k) Plan is a 401(k) plan that satisfies the required Average Deferral Percentage (ADP), Actual Contribution Percentage (ACP), and top-heavy tests. This is accomplished by providing, generally, one of two types of employer contributions.
Employer Match - The employer must match dollar-for-dollar on the first 3% of deferred compensation and $.50 on the dollar on the next 2% of deferred compensation. In other words, if a participant defers 5%, he or she would receive a match equal to 4%. If the participant defers only 3%, then he or she would receive a match equal to 3%. An "Enhanced Match" may be offered that is equal to or greater than the match discussed above.
2. Employer Nonelective Contribution - The employer must make a contribution of 3% of each eligible participant's compensation. This contribution is required even if the participant does not defer.
All employees over age 21 and who work at least 1000 hours are eligible. All contributions are 100% vested.
The thing that makes this 401(k) version great is that it allows all employees and employer to contribute the lesser of 100% of their compensation or $44,000 in 2006. Plus if one is over 50 they can contribute an additional $4000 annually.
Defined Benefit Plan
A defined benefit plan or pension plan can be another way for a business owner to make up the slack in their retirement portfolio. This strategy will work if you can answer yes to the following questions:
1) Are you at least 50?
2) Are you lagging in your retirement assets?
3) Can you set aside between $70k to $100k dollars a year from your business?
4) Does your business generate a $100k in profit a year?
5) Is that income predictable?
6) Are your employees younger and less well compensated?
Given the above affirmative answers one could contribute as much as $100k a year to a retirement plan for you. Your employees could all be covered for as low $20k. Remember every situation is different and you should consult your tax advisor before making any major changes to your business’ retirement plan.