September '15

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122 • RV PRO • SEPTEMBER 2015 rv-pro.com than this. All it requires is that the employer fill out an application form with a financial institution, such as a bank or insurance company that sponsors such a plan. The employer contributes no money to the plan and has no annual reporting requirement. Beyond record-keeping simplicity, the advantages of payroll deduction IRAs lie in their flexibility. Employees get to decide how much money to deduct from their salary to invest in their plans. The amounts can vary annually and some years can be skipped. In exchange for the IRA's simplicity and flexibility, there is a disadvantage: The annual contributions are limited to $5,000, plus an additional $1,000 for employees over the age of 50. These plans can be established by indi- viduals without the assistance of employers. However, few people take the initiative absent encouragement from the workplace powers-that-be. Furthermore, the payroll deduction process introduces a weekly reg- ularity and the investment of funds before they enter the employees' pockets. Both features encourage participation. 2. Simplified employee pension plan, also called the "SEP IRA." This one is very sim- ilar to the payroll deduction IRA described earlier. In this case, though, the employer makes all the contributions. That makes the plan a more powerful retention tool. Another advantage is that more money can be invested, which makes the plan more valuable to the recipient. The employer may contribute up to 25 percent of each employee's compensation, with a cap of $49,000. Like the payroll deduction IRA, there's no required contribution: The employer can decide how much to contribute, or whether to contribute at all, on a year-to- year basis. And overhead is still minimal: The plans require little paperwork beyond an initial submission of a two-page IRS Form 5305-SEP and the requisite payroll record keeping. Unlike traditional IRA's, however, these plans mandate participation requirements: Employers must offer them to all employees who are age 21 and older employed at a business for three of the last five years. And owners must contribute a uniform percentage of pay for each employee. 3. SIMPLE IRA Plan, formally referred to as "Savings Incentive Match Plan for Employees of Small Employers." This is a plan where both the employer and employee contribute. The employee decides how much to contribute each year, up to $11,500 (with additional $2,500 allowed for those 50 and over). The employer must then either match each employee's contri- bution (up to 3 percent of each employ- ee's compensation) or contribute a uni- versal 2 percent of the compensation of all employees eligible to participate, regardless of whether individual employees actually opt to participate. Once again, the paperwork is pretty lim- ited: Owners get the plan started by filing IRS Form 5304-SIMPLE and maintain the requisite payroll records. To use a SIMPLE IRA Plan, though, business owners must meet certain require- ments. The business must employ fewer than 100 people and must maintain no other retirement plan. And owners must offer the plan to all employees who have earned income of at least $5,000 in any prior two years, and are reasonably expected to earn at least $5,000 in the current year. (Alternatively, owners may opt to offer the plan to all employees.) In all three of the above plans, the amounts employees receive at retirement depend on two things: First, the amounts they have invested in the plans over the years. Second, the earnings that have resulted from the investments. Funds are taxable when withdrawn by the retired employees. Early withdrawals are subject to penalties. Save More Money Maybe the plans discussed above are just fine for most small businesses. The fact is, though, there are solid reasons for estab- lishing plans that allow for higher levels of contributions. These can be beneficial in terms of reducing current taxes and of building greater retirement savings. However, the downside of these plans are twofold: They have tougher require- ments in terms of record keeping and employee participation. There are three basic alternatives to IRA based plans. These are: 1) 401K plans, 2) Profit-sharing plans, and 3) Defined ben- efit plans. By far the most common retirement plan today is the 401K Plan, which gets its name from the relevant section number Company-sponsored retirement plans allow employers to recruit and retain workers while also allowing the business to lower its tax burden. Fortunately, there are plans available for all sizes of companies.

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