2004 Spring/Summer Volume No. 3

How to Insure a Secure Retirement For Your Employees and Yourself

The following are scenarios that illustrate the tax savings of contributing to a 401k plan,
which is deducted on a “pre-tax” basis.

Whether you are in your early twenties or late fifties, it is never too early or too late to start planning for retirement. If you are the owner of a portable restroom business, you can help your employees put money away that will enable them to retire comfortably too.

As an employer, a good retirement plan is a great way to help you build loyalty with workers and to help you lure new workers to your business as you grow.

Nowadays, with Federal deficits rising beyond record levels, all bets are off on whether Baby Boomers will ever enjoy monthly Social Security checks when they retire. That uncertainty makes planning for retirement even more important than ever.

Thanks to significant tax advantages, a retirement plan for you and your employees doesn’t have to cost a lot to provide a significant benefit after age 65.

First, a low to moderate income level person. This example is married, 0 exemptions:
This person earns $22,698 per year, paid weekly.

No 401k deduction
Gross Amount 436.50
FICA 33.39
Fed 38.65
St 21.83
401k 0.00
Net pay 338.48

Deduction at 3% of wages
Gross Amount 436.50
FICA 33.39
Fed 36.96
St 21.17
Cnty 4.02
401k 3% 13.10
Net pay 327.86
Net Savings 2.48
Here, we can see that $13.10 is going into their 401k, whereas their check is only $10.62 less.

Deduction at 15% of wages
Gross Amount 436.50
FICA 33.39
Fed 31.72
St 18.55
Cnty 3.52
401k 15% 65.48
Net pay 283.84
Net Savings 10.84
Here, $65.48 is being put away, but their check is only $54.64 less.

Next, a higher income level person. This example is also married, 0 exemptions:
This person earns $39,000 per year, paid weekly.

No 401k deduction
Gross Amount 750.00
FICA 57.38
Fed 75.67
St 25.50
Cnty 7.13
401k 0.00
Net pay 584.32

Deduction at 3% of wages
Gross Amount 750.00
FICA 57.38
Fed 72.30
St 24.74
Cnty 6.91
401k 3% 22.50
Net pay 566.17
Net Savings 4.35
Here, we can see that $22.50 is going into their 401k, whereas their check is only $18.15 less.

Deduction at 15% of wages
Gross Amount 750.00
FICA 57.38
Fed 58.80
St 21.68
Cnty 6.06
401k 15% 112.50
Net pay 493.58
Net Savings 21.76
Here, $112.50 is being put away, but their check is only $90.74 less.

Most importantly, when it’s time to file taxes, your ”wages, tips, and other compensation” amount is REDUCED by the total amount contributed to your 401k. So, you do not pay income taxes on the amount you’ve contributed.

How to Insure a Secure Retirement For Your Employees and Yourself

Retirement Plans
for Small Businesses
Retirement plans for your business can be as simple as opening a personal IRA and helping your employees to do the same. This entails contacting an investment company that manages IRAs, filling out their application forms, and returning the completed forms with a check.

However, there are more benefits to be had when you utilize complicated plans such as 401Ks and Keoghs. In general, the more complex the plan, the more options the plan allows. Although the different types of plans may sound confusing, choosing the one that’s right for you depends on what kind of benefits you expect from the plan.

Some plans allow you to borrow from them and pay back the money at very low interest rates. Other plans allow you to withdraw money for a first time home purchase or qualified educational expense without paying a penalty. These options allow you to get around the normal 10 percent early withdrawal fees.

Traditional or Roth IRA
An Individual Retirement Account, or IRA, provides a tax break today—being a straight deduction from your income—and it grows tax-deferred. You pay income tax on the money saved and the interest accrued. However, you only pay taxes as you use the money. Your withdrawals during retirement years are taxed like normal income. Because you will probably be in a lower tax bracket in retirement, you can save quite a bit on taxes.

A Roth IRA is different from a traditional IRA because you contribute to the account with money that has already been taxed. There is no tax advantage today, however if you are going to retire in at least 5 years (after age 59 1?2), you’ll be able to withdraw your investment earnings tax-free. Given enough time, the money in a Roth IRA may double or even triple due to compounding interest. All those investment earnings are yours to keep tax-free.

Which is the better deal-Roth or regular? If you have a long time to save for retirement, a Roth IRA will probably grow well beyond what was lost to taxes when the money was deposited. Therefore, for now, it’s a better deal. However, there is nothing to say that the Federal Government won’t change the law in the future, making Roth withdrawals taxable. Some people prefer traditional IRAs so that they get their tax deduction now— a bird in the hand being worth two in the bush.

An IRA (Roth and Traditional) has a yearly limit on contributions of $3000. However, starting in 2003 and 2004, people age 50 and over can contribute $3500.

SEP stands for Simplified Employee Pension; it is a plan where an employer agrees to contribute to an employee’s IRA. Employers get tax deductions for all the contributions they make for their employees. The assets in the account are subject to the same rules as any traditional IRA; however, the annual investment limits are a lot more generous, up to $41,000 in 2004.

The Savings Incentive Match Plan for Employees (SIMPLE) is for employers who have no other retirement plans and who have 100 or fewer employees. There are two types, SIMPLE IRA, or SIMPLE 401(k). Employees can deposit up to $8,000 per year in 2003, and $9000 per year in 2004 into the SIMPLE, and the employer must make a matching contribution not to exceed 3% of the employee’s pay. Employees 50 and over may contribute up to $9,000 in 2003 and $10,500 in 2004. Unlike traditional IRAs, there are penalties for withdrawing invested money before being with the employer for at least two years.

In a 401(k), plan contributions are taken directly from the employee’s salary. The employee elects to have a certain amount of his or her pay deferred and contributed to the plan. The employer may or may not provide matching contributions to the amount deferred, as provided in the plan. This type of plan provides tax-deferred retirement benefits for employees at little cost to an employer beyond the costs of administering the plan.

A Keogh plan may be established as either an employer benefit plan or an employee contribution plan. As an employer benefit plan it may be structured as a profit sharing plan, a money purchase plan, or a combination of the two. Because it is based on predetermined profit formulas, the amount contributed varies each year depending on company performance or other factors. Because an actuarial cost method is adopted to determine plan, contributions, this type of Keogh is generally more expensive to administer.

SEP vs. SIMPLE vs. Keogh
SEP-IRA contributions made by an employer are optional, and the employer doesn’t have to contribute money if the business isn’t making any. On the other hand, a SIMPLE or a Money Purchase Keogh plan requires a minimum contribution no matter how profitable or unprofitable the business is. Additionally, there are differences in who is eligible, how soon, and what IRS reporting is required.

We hope this has helped to straighten out some of the confusion surrounding the different retirement plans available for small businesses. There is surely a retirement plan that’s right for you and your business. However, we recommend that you consult a financial professional to make the choice that’s right for you.

The article is provided for your information only and is not intended as financial or tax advice or a recommendation. Because PolyJohn is not a legal, tax, or investment firm, please consult a professional tax advisor or financial planner before creating a retirement plan that’s right for you.

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