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Jerry Citarella: Available retirement plans for really small businesses

Financial Truth

Posted: April 10, 2012 2:00 a.m.
Updated: April 10, 2012 2:00 a.m.
 

Now that we’re just days away from the tax deadline for many individuals and businesses, I’m sure everyone has had enough tax talk. What I also know is that many people are saying, “Next year, we’ll do a better job setting things up properly.” This comment is usually followed by, “And this time, I mean it.”

Concerning businesses, especially small businesses, statements like these are uttered all too often. If you own a business, even when you do decide to do something differently, do you know what the choices are for setting things up properly?

Different-sized businesses have different decisions to make. For this discussion, I’m referring to business size based on the number of employees, not revenue or profit.

For medium- to large-sized businesses with 20 or more employees, retirement plan options are fairly obvious. There are decisions to be made about specifics and possibly some additional features, but, for the most part, there’s an obvious menu to choose from.

For smaller businesses, and especially really small businesses with one to five employees, sometimes the choices can actually be more difficult.

For the smallest businesses, many of the same options for large businesses are available, but additional options become accessible, as well. A problem I see often is that small businesses get turned off to preparing retirement plans because they explore more traditional plans better suited for larger companies.

The associated costs of many traditional plans can become prohibitive so the employer often decides not to implement anything. When appropriate plans are reviewed, any sized company can typically put something that makes sense in place, benefitting the owner(s) and the employee(s), if any.

Company-sponsored retirement plans are a lot like Q-Tips, Band-Aids or Kleenex. Each of these is actually only one brand of a particular product, but entire product lines are often referred to by these well-known names.

How many times have you said, “Please get me a Kleenex?” It’s not a Kleenex; it’s a facial tissue, just like it’s not a Q-Tip; it’s a cotton swab. You get the picture. This also often happens in the world of finances and insurance.

Two common misconceptions are: 1) All permanent life insurance policies being referred to as “whole life” and 2) all retirement plans being referred to as “401(k) plans.” For now, we’ll talk about the 401(k) confusion.

A 401(k) plan is actually just one type of company-sponsored retirement plan. In fact, it’s only one type of defined-contribution company-sponsored retirement plan.

There is also something called a defined-benefit company-sponsored retirement plan. Once you understand these differences, you can begin to understand the various options offered within each category, and there are many.

This column is not intended to teach everything there is to know about all the plans available, but it is meant to open your mind and help point you in the right direction. As I said earlier, some truly beneficial options are often overlooked by small companies.

There’s actually one amazing plan for single-owner businesses with no employees, such as a Realtor, for example, or an individual consultant.

There’s also a little-known rule stating that this plan can also be used for a husband/wife-only business. This plan is referred to as a Solo-K, Individual-K or Solo 401(k). Whatever the name used, the benefits and rules are the same, and they are very favorable for the right company or sole proprietor.

For small businesses, other plans that can most commonly be used are SEP IRAs, SIMPLE IRAs or what’s called a prototype 401(k) plan, which has lower costs than a custom or “administered” plan. If your business is really successful, you might want to consider a profit-sharing plan or a more extravagant defined benefit plan, using very specific financial vehicles, maximizing the benefits. There are so many choices, and most always a correct one.

Whether you’re a one-person business or you have just a few employees, don’t shy away from exploring retirement plan options. If you’ve explored them in the past and decided not to move forward, maybe it’s time to take another look. Some things have changed and there’s a chance you may have previewed the wrong plans.

Jerry Citarella is the owner of Infinity Wealth Management www.InfinityGoals.com. 23734 Valencia Blvd., Suite 301, Valencia, 661-255-9555, ext. 11.  He is also the author of The Truth Helps Series of financial planning books. Citarella’s column reflects his own views and not necessarily those of The Signal. Submit questions to: jcitarella@nextfinancial.com.  Securities and investment advisory services offered through NEXT Financial Group Inc. Member FINRA/SIPC.  Infinity Wealth Management is not an affiliate of NEXT Financial Group Inc.

 

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