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PVW Law: Should I Adopt a Retirement Plan for my Business?

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If you are the owner, member of the board of directors or in a key business position in your business, you may be considering adopting a qualified retirement plan to benefit you and the other employees of your business. Adopting such a plan can create significant tax advantages, provide income security throughout your retirement and provide an excellent recruitment and retention tool for qualified employees.

“Qualified retirement plan” is a general term used to describe retirement plans that meet special tax requirements for tax favored treatment. Types of qualified plans include 401(k) plans, 403(b) plans, profit sharing plans, Simplified Employee Pension IRA Plans (SEP IRAs), Savings Incentive Match Plan for Employees IRA (SIMPLE IRAs), defined benefit plans and such hybrids as a cash-balance plan. The type of plan that is available and best suited for you and your business will vary depending on numerous factors, including whether your business is a tax-exempt entity, the amount and type of benefit you would like to provide to you and your employees, and the demographics of your workforce, including the number of employees and their ages, years of service to the company and annual compensation.

By adopting a qualified retirement plan, your business will receive a tax deduction for any contributions made to the plan on behalf of your employees. In addition, and in contrast to salary paid to employees, contributions you make to the plan on behalf of your employees will not be subject to Social Security and Medicare taxes. Also, contributions made by you or your employee will not be included in taxable income for your employee for the year and contributions to the plan may be invested and are allowed to grow tax-free.

It is often difficult to compensate hard work performed by you or your employees without incurring significant tax consequences. For example, you could pay yourself an additional $20,000 through a salary increase or bonus. However, in order to provide an additional $20,000, the company will incur a combined $1,530 in Social Security and Medicare tax (assuming your salary is under the $106,800 Social Security wage threshold). In addition, the payment would be subject to a combined $1,130 in Social Security and Medicare taxes to you and would also result in an additional $6,000 in federal and state income taxes (assuming a combined rate of 30 percent). As a result, from the $21,530 cost incurred by the company, you will receive just $12,870 in take-home pay. In contrast, you could contribute $20,000 to your qualified plan with no immediate tax consequences to your business or yourself. That same $20,000 contribution would also earn interest or gains from investments on a tax-free basis.

In addition to the significant tax savings provided to retirement plans due to the effects of compounding small, regular contributions to a qualified retirement plan can provide you and your employees an opportunity for significant wealth accumulation that can provide peace of mind and income security for the entirety of your retirement.



For more information visit www.pvwlaw.com


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