Choosing A Retirement Solution

Starting a retirement savings plan can be easier than most business owners think. What's more, there are a number of retirement programs that provide tax advantages to both employers and employees. 

Why Save? 
Experts estimate that Americans will need 70 to 90 percent of their pre-retirement income to maintain their current standard of living when they stop working. So now is the time to look into retirement plan programs. As an employer, you have an important role to play in helping American workers save. 
By starting a retirement savings plan, you will help your employees save for the future. Retirement plans may also help you attract and retain qualified employees, and they offer tax savings to your business. You will help secure your own retirement as well. You can establish a plan even if you are self-employed. 


Any Tax Advantages?
A retirement plan has significant tax advantages.

• Employer contributions are deductible from the employers income
• Employee contributions (other than Roth contributions) are not taxed until distributed to the employee
• Money in the plan grows tax free 

Any Other Incentives?
In addition to helping your business, your employees, and yourself, it is easy to establish a retirement plan, and there are additional reasons for doing so:

• High contribution limits so your employees (and you) can set aside large amounts for retirement
• "Catch-Up" rules that allow employees age 50 and over to set aside additional contributions. The amount varies, depending on the type of plan. 
• Tax credit for small employers that would enable them to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or certain other types of plans (more on these later). The credit equals 50 percent of the cost to set up and administer the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. 
• Tax credit for certain low-and moderate-income individuals (including self-employed) who make contributions to their plans ("Savers Credit). The amount of the credit is based on the contributions participants make and their credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate an be as low as 10 percent or as high as 50 percent, depending on the participant's adjusted gross income; and 
• A Roth 401(k) program that can be added to a 401(k) plan to allow participants to make after-tax contributions into separate accounts, providing an additional way to save for retirement. Distributions upon death or disability or after age 59 1/2 from Roth accounts held for 5 years, including earnings, are generally tax free. 

Small Business Tax Credit for 401k Start Up Costs

http://www.irs.gov/pub/irs-pdf/f8881.pdf

According to the U.S. Department of Labor statistics, 64 percent of all employees in medium and large sized firms are covered by an employment based retirement plan, compared with only 34 percent at small firms. One reason cited by small businesses for not offering retirement plans is the high costs associated with set-up and administration of a retirement plan.

Start up costs have always been a major hurdle to small businesses who want to start a 401k plan, but a provision of The Economic Growth and Tax Relief and Reconciliation Act (EGTRRA) now helps scale this barrier to employee saving opportunities. EGTRRA implemented a credit for employers to offset the start up cost and the cost of educating employees about the new plan.

For costs paid or incurred, you may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or qualified plan (including a 401k). The credit equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first three years of the plan. You can choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.

You must have had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year. At least one participant must be a non-highly compensated employee. The employees generally cannot be substantially the same employees for whom contributions were made or benefits accrued under a plan of any of the following employers in the three-tax-year period immediately before the first year to which the credit applies.

1. You
2. A member of a controlled group that includes you
3. A predecessor of (1) or (2)

The credit is part of the general business credit, which can be carried back or forward to other tax years if it cannot be used in the current year. However, the part of the general business credit attributable to the small employer pension plan start up cost credit cannot be carried back to a tax year beginning before January 1, 2002.

To take the credit, get Form 8881, Credit for Small Employer Pension Plan Start up Costs, and the instructions.