Archive for January, 2010
Contributing to an Employee’s 401k
If you own a small business, you will incur a greater expense per person to create benefits like a 401k matching system. As your business grows, there is an incremental cost to adding one more employee to the company plan. Unfortunately, you do not often have the benefit of waiting until your business is a success to offer retirement assistance. To recruit top talent to grow your business, you will need to offer competitive benefits.
Attract Talent with 401k Matching
Top talent will be looking for an opportunity where they can be rewarded for saving toward retirement. Those people who save for retirement tend to be educated, white collar workers. Attracting these people will be necessary if you intend to grow your business. Some large corporations match 401k contributions up to 10%. Small businesses do not have the luxury of providing that type of assistance. However, you can still offer 401k assistance to employees, agreeing to set up and manage their 401k. Even matching a small 2-3% of their salary will be enough to attract many great employees. You get a tax benefit to delivering these funds, so the net cost to you is much lower.
Balance 401k Matching and Salary
Large corporations offering high 401k matching and high benefits tend to actually offer smaller salaries. They use their big name, marketing efforts, impressive facilities and corporate culture to drive applicants through their doors. Salaries can be much lower for a multi-state corporation than for a local corporation in the same industry. You will need to understand the balance between salary and benefits. 401k matching is a form of compensation, and it should be considered as a total part of the compensation package. When an employee is unhappy with a low matching, you may show comparisons on the market explaining her salary is actually higher to compensate for the difference.
Offer Retirement Alternatives
You can save money for your corporation by offering alternatives to traditional 401k accounts. 401k accounts require you to establish a fund and hire a fund manager to oversee your employee’s dollars. You will also have to set up a pay system to deposit funds into the employee’s account each month. You can consider an alternative, such as allowing an employee to elect an independent retirement account each year. The employee can provide a financial statement of total contributions in a given year, and you can cut a check for your match.
Consider Equity
Many small companies offer equity instead of retirement savings. This is particularly common for start up companies. Recruit top talent by asking them to help you build the business. Pay based on profit sharing. When an employee retires, then, the employee can be paid off for his or her equity in the company. The added benefits of equity sharing are higher productivity and higher employee retention. When associates feel they have a common goal and are rewarded based on their contribution to that goal, they are more likely to work toward the goal strongly. They will also be less likely to walk away from the business knowing they have a great potential for profit if they simply stick with it.
Tags: equity sharing, independent retirment options, small business 401k
Retirement Savings for the Self-Employed
Working for yourself comes with a number of benefits: flexible schedules, unlimited income and even the choice of when and where to work. Unfortunately, there are a number of organizational disadvantages to self-employment. These include managing taxes, locating health care and making sure you are saving for retirement. When you work with a large company, your retirement account may be a standard benefit, perhaps even matched by the company. Turning down this institutional benefit does not mean you cannot save for retirement. More importantly, it does not mean you should not save for retirement.
Establishing an IRA
The most common option for retirement savings for the self-employed individual is an IRA, or Independent Retirement Account. Any individual can elect to set up an IRA, and there is not a minimum contribution like there is with some CD offerings. Even if you are investing in CDs, mutual funds or stocks, you should elect to have at least one dedicated retirement account. This helps with personal accountability, offers significant tax advantages, and assures you have some low-risk investments.
Tax Benefits of an IRA
The main reason to elect an IRA over other investments is to deduct the savings from your taxable income on a yearly basis. Depending on the unique structure you choose, you will either realize that benefit today or in the future. In both cases, though, the IRA poses advantages over buying a stock, where you will buy with post-tax dollars and incur taxes on any profits earned.
How much to Contribute to an IRA
You can contribute as much or as little as you would like to an IRA as long as you are within yearly maximums set by the government. These maximums depend on the structure of your IRA and your income. In general, though, these accounts allow you to decide how much you will save each year. It is advisable to save between 3% and 10% of your income each year in a retirement account. If you have more flexible income to save each month, it is best to cap your IRA and save the funds elsewhere. For example, you can purchase a CD or stock with a higher potential return on your investment. This will maximize your potential earnings while still protecting you for retirement needs.
Roth vs. Traditional IRA
In general, a Roth IRA is best for a low-income earner. You are taxed at your current rate with no immediate tax advantages. However, when you withdraw the funds in the future, you will not have to pay taxes at that point or on earnings. The cap for yearly contributions to a Roth IRA is very low, currently $5,000. A traditional IRA has a higher yearly maximum and more tax benefits in the short run. This is best for a high income individual who is already taxed at a fairly high bracket. Contributions are deducted immediately from the taxable income, grow tax free, and are then taxed upon withdrawal. The traditional IRA option may be used in conjunction with the Roth option in order to gain maximum tax benefits.
Tags: independent retirement account, ira, roth ira, saving for retirement, self-employed ira, traditional ira