If you run a small business in the
electrical industry, you’ve got no shortage of concerns:
cash flow, marketing, the ebb and flow of the economy—you
name it. In fact, you have so many issues to ponder you might
find it hard to take the time to choose a retirement plan for
your business. And yet, it’s worth the effort—because the
right plan can offer the opportunity to make your life a lot
easier in the days when you don’t have so much to think
about.
Fortunately, there’s never been a better
time for small-business owners to choose a good,
cost-efficient retirement plan. In recent years, new tax laws
have made it easier for you to pick a plan that can help you
save for retirement and, if necessary, attract and retain
quality employees; just as the National Electrical Code,
the tax laws change.
The most common types of retirement plans
offer tax-deferred growth of earnings, the ability to make
tax-deductible contributions and a variety of investment
options. Beyond sharing these traits, though, small-business
retirement accounts differ in contribution limits and other
factors. Let’s look at a few of these plans:
Plans for
Self-Employed Electrical Professional (No Employees)
Owner-only 401(k)
When you establish an "owner-only 401(k)," you
can put in up to 25 percent of your compensation in a
profit-sharing plan, plus $13,000 (in 2004) as 401(k)
contributions. If you’re 50 or older, you can even put in an
extra $3,000 to your 401(k). (You can’t contribute more than
$41,000 per year if you’re under age 50.) Furthermore, both
the 401(k) and 50-and-over "catch-up" limits will be
increasing over the next two years, so you’ll be able to put
away even more money for retirement. Plus, you can transfer
most retirement plan assets—such as profit sharing and
money-purchase plans—into your owner-only 401(k).
SEP–IRA
For 2004, you can put in the lesser of $41,000 or 25
percent of your compensation to your SEP-IRA. Eligible
compensation is capped at $205,000 for 2004. You can set up a
SEP-IRA for your business with a minimum of paperwork. And you
won’t have to file any annual reports on the plan, such as
the Form 5500, either.
Plans for
Electrical Professionals That Are Business Owners with
Employees
SIMPLE IRA
As you can deduce from its name, a SIMPLE IRA is easy to
set up and inexpensive to administer. In 2004, employees can
contribute up to $9,000 (or $10,500 for those 50 and older) to
their SIMPLE IRA. Your business is generally required to match
your employees’ contributions up to three percent of their
salary, unless you decide to put in two percent of each
eligible employee’s compensation. If you choose the matching
option, you can reduce the match to between one and three
percent in two of every five years.
Safe Harbor 401(k)
By following some specific guidelines, you can set up a
Safe Harbor 401(k)—a plan that offers the same features of a
traditional 401(k), but without the burdensome
non-discrimination testing required to identify excessive
contributions by highly compensated employees. [Employees’
contribution limits are the same as those described in the
"owner-only 401(k)."] The key benefit of the Safe
Harbor 401(k) is that you, the business owner, can contribute
up to the annual dollar amount (in 2004, that’s $13,000, or
$16,000 if 50 or older), regardless of how much your employees
contribute.
Any of these plans can help you meet your
long-term goals of saving for your retirement outside the
value of your business. But to fully diversify your holdings
and build even more resources, you will also need to save and
invest outside your retirement plan. Your electrical business
makes up the majority of your net worth, but remember the
golden rule: DIVERSIFY, DIVERSIFY, DIVERSIFY. So, meet with
your investment representative and tax advisor to choose a
plan that’s right for you—but don’t stop there. When it
comes to funding your retirement, it’s hard to save too
much.
Jesse Abercrombie specializes in providing
investment advice to electrical contractors.
For more information on how to plan your
retirement, contact Jesse Abercrombie, financial advisor at
Edward Jones Investments, by phone (972) 241-8059. |
