FINANCIAL FOCUS Own a Small Business? Consider These Retirement Plans

For a variety of reasons, many people, particularly those in the baby boom generation, are considering retiring later than they might have originally planned. If you’re in this group, you’ll want to take full advantage of those extra working years by contributing as much as you can to a retirement plan that can help you build resources, defer taxes and, ultimately, maximize income. And if you own a small business, you’ve got some attractive plans from which to choose.

Let’s look at two of these retirement plans — the “owner-only” 401(k) and the defined benefit plan.

If you have no employees other than your spouse or a partner, you can establish an “owner-only” 401(k), also known as an individual 401(k). This plan offers many of the same advantages of a traditional 401(k): a range of investment options, tax-deductible contributions and the opportunity for tax-deferred earnings growth. You may even be able to choose a Roth option for your 401(k), which allows you to make after-tax contributions that have the opportunity to grow tax free.

            Your owner-only 401(k) contributions consist of two parts: salary deferral and profit sharing. In 2011, you can defer up to $16,500 of income, or $22,000 if you’re 50 or older. The amount of your profit-sharing contribution is based on your earnings. The sum of your employer contribution and your salary deferral contributions can’t exceed $49,000 in 2011 (or $54,500 if you’re 50 or older). Keep in mind that if your spouse is employed by your business, you each can contribute the maximum amount allowed.

            You’ve got considerable flexibility in funding your owner-only 401(k). Both the salary deferral and the profit-sharing contributions are discretionary, so you can change them at any time based on your business’s profitability.

            Now, let’s move on to the defined benefit plan, which might be appropriate for you if you are highly compensated and have no other employees. By establishing a defined benefit plan, you’ll be providing yourself with a monthly payment (or “benefit”)           

for life, beginning at the retirement age specified by your plan. In 2011, the yearly benefit limit is $195,000.

            The amount you can contribute to your defined benefit plan each year is based on several variables, including your current age, your compensation level and your retirement age. But you’ll certainly be able to contribute large amounts: A defined benefit plan is the only retirement account that allows contributions in excess of the limits placed on 401(k)s and other defined contribution plans. Generally speaking, the closer you get to retirement, the larger your maximum yearly contributions will be. (This is because you’ll have fewer years left in which to fund your defined benefit.) And since your defined benefit contributions are tax-deductible, you are, in effect, getting a big boost from the government to fund a generous retirement plan.

Here’s one more benefit to owner-only 401(k) and defined benefit plans: You can contribute to both of them at the same time. But before you choose either or both of them, consult with your tax and financial advisors. After all, you work hard to help provide for a comfortable retirement tomorrow — so you’ll want a retirement plan working hard for you today.

           

Lifetime Income: A Great Mother's Day Gift

Mother’s Day will soon be here.  If you’re a mother, you will (hopefully) receive thoughtful cards and gifts. But there’s one present you may eventually want to give yourself, and it’s a gift that truly does keep on giving: a strategy for your retirement. Of course, it’s important for everyone to build adequate financial resources for retirement — but the challenge is even greater for women. Largely due to family responsibilities, women spend, on average, 12 years less in the workforce than men, according to the Women’s Institute for a Secure Retirement. Less time in the workforce equates to lost earnings, missed promotions, smaller and fewer raises and reduced retirement plan benefits. In fact, men have, on average, about $91,000 in Individual Retirement Accounts (IRAs), including all IRA types and the amounts rolled over from other retirement accounts into IRAs, compared to just $51,000 for women, according to a recent report issued by the Employee Benefit Research Institute.

Whether you’re married, divorced, widowed or single, you’ll want to build financial resources of your own and be prepared to manage your finances during your retirement years. You’ll be helping yourself, and, by becoming financially independent, you’ll also avoid the possibility of depending on your grown children for support.

To help ensure a financially secure retirement, consider these ideas:

• Fully fund your IRA each year. As the numbers above show, women are way behind men when it comes to funding their IRAs. And IRAs, with their tax advantages, are great retirement-savings vehicles. A traditional IRA has the potential to grow on a tax-deferred basis, while Roth IRAs have the potential to  grow tax-free, provided you’ve had your account at least five years and you don’t start taking withdrawals until you’re 59-1/2. So make it a priority to “max out” on your IRA each year. In 2011, you can put in up to $5,000 to a traditional or Roth IRA, or $6,000 if you’re 50 or older. 

• Boost your 401(k) contributions. Put in as much as you can afford to your 401(k) or other employer-sponsored retirement plan. At the very least, contribute enough to earn your employer’s match, if one is offered. (In 2011, you can put in up to $16,500, or $22,000 if you’re 50 or older.) Your earnings have the opportunity to grow tax-deferred and you have a range of investment options, so your 401(k) or other retirement plan can be an effective, flexible way to put money away for the future.

• Invest in an annuity. If you’ve reached the contribution limits of your IRA and 401(k), you may want to consider purchasing an annuity, which can be structured to provide you with regular payments for the rest of your life. And this lifetime income source is especially important to women, who, at age 65, can expect to live, on average, almost 20 more years, compared to slightly over 17 for men of the same age, according to the Centers for Disease Control and Prevention.

As a mother, you willingly spend a great deal of time and effort on your children. But it’s important to also think about yourself and your future, so review your strategy for retirement with your financial advisor, and take the actions needed to help make sure you can enjoy all the Mother’s Days of your life in the comfort you deserve.