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401-K's & 401-K Type Retirement Plans

Payroll Deduction IRAs

Even if an employer does not want to adopt a retirement plan, it can allow its employees to contribute to an IRA through payroll deductions, providing a simple and direct way for eligible employees to save. The decision about whether to contribute, and when and how much to contribute to the IRA (up to $4,000 for 2007, $5,000 in 2008, increasing thereafter) is always made by the employee in this type of arrangement.

Many individuals eligible to contribute to an IRA do not. One reason is that some individuals wait until the end of the year to set aside the money and then find that they do not have sufficient funds to do so. Payroll deductions allow individuals to plan ahead and save smaller amounts each pay period. Payroll deduction contributions are tax-deductible by an individual, to the same extent as other IRA contributions.

Simplified Employee Pensions (SEPs)

A SEP allows employers to set up a type of IRA for themselves and each of their employees. Employers must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year. For the year 2007, employer contributions are limited to the lesser of 25 percent of pay or $45,000. (Note: the dollar amount is indexed for inflation and will increase.) Most employers, including those who are self-employed, can establish a SEP.

SEPs have low start-up and operating costs and can be established using a two-page form. And you can decide how much to put into a SEP each year – offering you some flexibility when business conditions vary.

SIMPLE IRA Plan   (The plan of choice for the Tomei Agency)

This savings option is for employers with 100 or fewer employees and involves a type of IRA.

A SIMPLE IRA plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions. Under SIMPLE IRA plans, employees can set aside up to $10,500 in 2007 by payroll deduction. For years after 2007, annual cost-of-living updates can be found at www.irs.gov/ep. Employers must either match employee contributions dollar for dollar – up to 3 percent of an employee’s compensation – or make a fixed contribution of 2 percent of compensation for all eligible employees.

SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs (to hold contributions made under the SIMPLE IRA plan) are set up for each employee. The Tomei Agency can help with much of the paperwork. Additionally, administrative costs are low.

Employers may either have employees set up their own SIMPLE IRAs at a financial institution of their choice or have all SIMPLE IRAs maintained at one financial institution chosen by the employer.

Employees can decide how and where the money will be invested, and keep their SIMPLE IRAs even when they change jobs.

401(k) Plans

401(k) plans have become a widely accepted retirement savings vehicle for small businesses. Today, an estimated 44 million American workers participate in 401(k) plans that have total assets of about $2.5 trillion.

With a traditional 401(k) plan, employees can choose to defer a portion of their salary. So instead of receiving that amount in their paycheck today, the employee can contribute such amount into a 401(k) plan sponsored by their employer. These deferrals are accounted separately for each employee. Generally, the deferrals (plus earnings) are not taxed by the federal government or by most state governments until distributed.

401(k) plans can vary significantly in their complexity. However, many financial institutions and other organizations offer prototype 401(k) plans, which can greatly lessen the administrative burden on individual employers of establishing and maintaining such plans.

Safe Harbor 401(k) Plans

A safe harbor 401(k) plan is intended to encourage plan participation among rank-and-file employees and to ease administrative burden by eliminating the tests ordinarily applied under a traditional 401(k) plan. This plan is ideal for businesses with highly compensated employees whose contributions would be limited in a traditional 401(k) plan.

A safe harbor 401(k) plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions. In a safe harbor 401(k) plan, the mandatory employer contribution is always 100 percent vested.

Automatic Enrollment Safe Harbor 401(k) Plans

Beginning in 2008, automatic enrollment safe harbor 401(k) plans can increase plan participation among rank-and-file employees and ease administrative burden by eliminating the tests ordinarily required under a traditional 401(k) plan. This plan is for employers who want a high level of participation, and also have highly compensated employees whose contributions might be limited under a traditional plan.

All employees are automatically enrolled in the plan and contributions are deducted from their paychecks, unless they opt out after receiving notice from the plan. There are set employee contribution rates, which rise incrementally over the first few plan years, although different amounts can be chosen. Employer contributions are also required. In addition, there is a safe harbor for the default investment options provided under the plan that relieves the employer from liability for the investment results. Where contributions are invested in automatic enrollment plans, state payroll withholding law is preempted, so plans may automatically deduct contributions from employees’ wages unless they opt out.

457 plan

The 457 plan is a type of tax advantaged defined contribution retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax basis. For the most part the plan operates similarly to a 401(k) or 403(b) plan most people are familiar with in the US. The key difference is unlike a 401(k) plan, there is no 10% penalty for withdrawal before the age of 59 1/2 (although the withdrawal is subject to ordinary income taxation).

 

Profit-Sharing Plans

Employer contributions to a profit-sharing plan are discretionary. Depending on the plan terms, there is often no set amount that an employer needs to contribute each year.

If you do make contributions, you will need to have a set formula for determining how the contributions are allocated among plan participants. The funds are accounted separately for each employee.

As with 401(k) plans, profit-sharing plans can vary greatly in their complexity. Similarly, many financial institutions offer prototype profit-sharing plans that can reduce the administrative burden on individual employers.

Defined Benefit Plans

Some employers find that defined benefit (DB) plans offer business advantages. For instance, employees often value the fixed benefit provided by this type of plan. In addition, employees in DB plans can often receive a greater benefit at retirement than under any other type of retirement plan. On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. However, defined benefit plans are more complex and, thus, more costly to establish and maintain than other types of plans.





 
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Securities offered through Investment Planners Inc. Member FINRA/SIPC 226 W. Eldorado St., Decatur IL 62525, Tomei Insurance Agency is not affiliated with Investment Planners Inc
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223 N. IL Route 21 (at Washington St) | Gurnee, IL 60031
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