Last But Not Least

Small business owners, whether incorporated or not, have a number of retirement plan options available. If you are considering starting a retirement plan, you should first learn about the kinds of plans available to you. In this article, we'll discuss two popular retirement plans used by small businesses and the benefits of each.

One of the most popular is the SEP or Simplified Employee Pension. You can contribute 25% of your compensation up to $45,000 for yourself. Of course, you must make a similar contribution for any employees you have. In other words: if you make a 25% contribution for yourself, you must make a 25% contribution for your employee(s) based on their salaries. The benefits:

• You can still set up, make a contribution and get a tax deduction for 2007 as long as it's done by your tax filing deadline.
• SEP plans have the least paperwork and reporting requirements of any plan, making it easy to set up and administer.
• You decide whether to make a contribution year-to-year giving you some flexibility in an economic slowdown.

Another popular plan - especially if you have employees - is the SIMPLE IRA or Savings Incentive Match Plan for Employees. The benefits:

• A SIMPLE plans allows for payroll deductions by employees - $10,500 in 2007 with a catch-up provision for those over age 50.
• Employee contributions are matched, usually dollar for dollar of the first 3%. In other words...you are only providing a contribution for those who choose to participate.
• No annual filing requirements and most of the paperwork is handled by the bank or financial institution making the investments for you and your employee(s).

For more detailed information on retirement plans, including rules for setting them up, the IRS offers a free CD-ROM called "Individual Retirement Arrangement Resource Guide for Small Business Owners and Individuals". You can order a copy at www.irs.gov/retirement (the fastest way to find it on the website is to type IRA Resource Guide for Small Business Owners in the search box). Also check out IRS Publication 560 - "Retirement Plans for Small Business".

There are significant tax benefits to any retirement plan. They include the fact that contributions are tax deductible and contributions plus earnings grow without taxation until they are withdrawn. Of course, there are drawbacks as well. To name just two: plan assets are illiquid and there is a substantial penalty (10% plus tax) for early withdrawal.

In addition to helping your business, yourself and your employees, recent tax law changes have handed out more incentives to establish a retirement plan. They include:

• Contribution limits that increase regularly allowing you and employees to set aside every larger amounts for retirement.
• Catch-up provisions that allow employees age 50 and over (including yourself) to side aside additional contributions.
• Tax credit for small employers that may enable you to claim a tax credit of 50% of the cost of setting up and administering a SEP or SIMPLE IRA plan. There is a maximum cap of $500 per year for each of the first 3 years of the plan. As exciting as this sounds, it's very unlikely that you'd ever get to use it since these plans typically don't involve a fee for set up and administration.
• Tax credit for certain low and moderate- income participants (including the self-employed). The amount of the credit is based on the contribution made and the credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate can be as low as 10% or as high as 50% depending on adjusted gross income. Talk with your tax advisor for more information.

Take Away Wisdom

As a small business owner, there are lots of really good reasons to have a retirement plan. The type of plan you choose is based on your business and personal situation. You may want to talk with your tax advisor or give me a call and we can flesh-out which plan is appropriate for you. However, if you are looking for a tax deduction for 2007

As a small business owner, there are lots of really good reasons to have a retirement plan. The type of plan you choose is based on your business and personal situation. You may want to talk with your tax advisor or give me a call and we can flesh-out which plan is appropriate for you. However, if you are looking for a tax deduction for 2007 - your only option may be a SEP Plan.

Joan Gilles is a wealth building strategist to the entrepreneur/small business owner/independent professional; building a bridge to your dreams and peace of mind. She can be reached by email at jmgilles@pressenter.com or through her website at http://www.JoanGillesFinancialCoach.com