Finance concessionaire

Q: I have a small decorating business and I’ll be the first to acknowledge that I don’t cognize anything about taxes or retirement plans. I’d like to put up a 401(k) or an individual retirement account or some other sort of retirement program for me and my three employees. What are the assorted retirement program options available for a small business proprietor and in your opinion, which would work best for me?
-- Wanda S.

A: Wanda, I appreciate your assurance in my low opinion, but asking me for financial advice is like asking Donald Trump for a recommendation on hair care products. I can state you what works best for me and my business, but you’ll need to make your homework and seek professional advice to calculate out what would work best for you. As a side note, I hear that Donald Trump is coming out with his ain line of hair care merchandise soon to be called “Big Head.” The expression is 1% mousse, 1% liquid nails, and 98% hot air. It should be a large marketer among the high brow, comb-over crowd.

Here’s my best advice on retirement plans: happen yourself a financial advisor (or financial planner) who is have got experience workings with small businesses and have him or her explain the options available and do a recommendation as to the type of program best suited for you and your business. When I state “financial advisor” I’m not talking about your know-it-all brother-in-law Oregon your accountant. I’m talking about a broker or financial contriver (or other accredited professional) who have a proved path record of making his clients money and is an expert on IRAs, 401(k)s, common funds, etc.

The best manner to happen a good financial advisor is to inquire for referrals from your most successful friends and associates. Find the richest, stingiest adult male in town and inquire who his advisor is. Meet with respective advisors, explicate your situation, and inquire for their recommendations. You should also do certain the advisor is a good tantrum for your personality and your business. If all travels well you will be doing business with this individual for many old age to come, so do certain the human relationship experiences comfy to you and that you are confident in the advisor’s ability to manage your money.

Let me give you a quick overview of a few of the retirement programs available to small businesses so you at least have got got an thought of what’s out there before you begin your search for a good financial advisor.

As a small business you basically have three types of retirement programs that you can take advantage of: the Self-Employed 401(k); the Simplified Employee Pension Plan or September IRA, and the Savings Incentive Match Plan for Employees or simple IRA. Each allows you to do pre-tax contributions to the plan, which allows you salvage for retirement and decrease your taxable income by the amount of the contribution. Your investings also turn tax-deferred until withdrawal.

A Self-Employed 401(k) is an option for self-employed individuals or business proprietors with no employees other than a spouse. The business can be a exclusive proprietorship, a partnership, or a corporation, including Second corps. You can do wage recesses to this type of program of up to $14,000 for 2005.

Next is the Simplified Employee Pension Plan or September IRA. A September is an option if you earn a self-employed income from a full or portion clip business, even if you are covered by a retirement program at your fulltime job. A September allows you to lend up to 25% of earned income, up to $41,000 for 2004 and $42,000 for 2005.

My preferred type of retirement program is the Savings Incentive Match Plan for Employees or simple IRA. The simple individual retirement account was created to do it easier for small businesses with 100 or fewer employees to offer a tax-advantaged, company sponsored retirement plan.

With a simple individual retirement account you and your eligible employees may lend up to 3% of earned income (with a upper limit part of $10,000) on a pre-tax basis to individual simple IRAs. You must subtract Sociable Security and Medicaid from your gross income, but you can then do your simple individual retirement account part before other taxes are levied, effectively lowering your taxable income.

As the employer you must do “matching” Oregon “non-elective” contributions into your employees’ simple individual retirement account accounts. Duplicate parts intends that the business fits the elected recess parts made by employees. For example, if the employee opts to lend 3% of his wage to the plan, the employer must fit the 3% contribution.

At first you might cringe at matching your employees’ contributions, but as the business proprietor and an employee yourself this tin be great news. As an employee of your ain business you can lend up to $10,000 to your simple individual retirement account and the business can then fit your part dollar-for-dollar, which intends that you can set up to $20,000 in tax free dollars into the program per year. The cost of the parts is also deductible as a business expense.

The non-elective contribution option necessitates that the company lend 2% of every employee’s earned income to the program on the employee’s behalf regardless of whether or not the employee lends to the program himself. For 2005 the upper limit part you would be required to do is $4,200.

Like a traditional IRA, you can retreat money from a simple individual retirement account at any time; however statistical distributions within the first two old age of engagement are subject to higher early backdown punishments than traditional IRAs or Philip Roth IRAs. Withdrawals within the first two old age are subject to a 25% early backdown penalty. Withdrawals taken after the first two old age are subject to a 10% early backdown penalty.

As the employer, the advantages of a simple individual retirement account include: company parts to the program are tax deductible as a business expense; program written documents are simple and easy to administer; disposal costs are low; and there is no authorities reporting required by the employer.

The advantages of a simple individual retirement account for your employees include: parts are immediately 100% vested; parts and earnings are tax-deferred until withdrawal; employees can lend 100% of earned income up to $10,000 for 2005; and employees can direct their ain investings within the IRA.

This is a complex subject and I’ve just tipped the iceberg here, but hopefully this volition give you enough information to get the investing ball rolling.

Here’s to your success!

Tim Knox