IRA, SEO, SIMPLE and 401(k) Plans
Whether your retirement days are near or far, you should be aware of the types of retirement plans available to you and your employees. The most common are Individual Retirement Arrangements, SEP, SIMPLE, IRA and 401(k) plans. In addition to providing you with income during your retirement, they offer significant tax benefits today.
Individual Retirement Arrangements
IRAs allow you to set aside money for your retirement. Banks, financial institutions, mutual funds and stockbrokers are among those who offer IRA accounts.
To contribute to a traditional RA, you must be under age 70½ at the end of the tax year and have taxable compensation greater than or equal to your contribution during the year. Contributions may be tax deductible in full or in part, depending on your circumstances. The amounts earned by your IRA contributions are usually not taxed until you withdraw the money. Generally, you can’t withdraw money from your IRA before you turn age 59½ without paying income taxes and a 10 percent additional tax.
Regardless of your age, you may be able to set up a Roth IRA. You can’t deduct your contributions, but if certain requirements are met, distributions will be tax-free.
The Simplified Employee Pension (SEP) plan was specifically designed for small employers and has few administrative burdens or costs. Employer contributions are made directly to IRAs that the employer sets up for the employees.
Generally, employers can set up a Savings Incentive Match Plan for Employees if they have 100 or fewer employees and meet other requirements. A SIMPLE plan is an arrangement under which an employer makes contributions to employees’ SIMPLE retirement accounts. Additionally, employees can make salary reduction contributions.
The two types of SIMPLE plans are the SIMPLE IRA and SIMPLE 401(k) plans.
401(k) plans are the most popular type of retirement plan today. They can be a powerful tool in promoting financial security in retirement for employees and are a valuable option for businesses considering a retirement plan. Employees may defer a portion of their salary as either a pre-tax or an after-tax contribution. Depending on the type of 401(k) plan, the employer can make either non-elective or matching employer contributions.