Starting a pension plan for your company
The very first item to consider when starting a pension plan for your companyis to decide which course of action to take. What would benefit your company more either a defined benefit plan or a defined contribution plan?
***A defined contribution plan***
These plans are comprised from a broad range of programs such as profit sharing, 401k, money purchase, Keogh, and SEP-IRA plans. They allow business owners and employees to make retirement contributions that are allocated to individual participent accounts.
Funds available at retirement are the accumulation of those contributions plus investment earnings. Although it is uncertain what the expected amount, or benefit will be upon retirement. These plans are generally more favorable to younger employees who have a longer time horizon to retirement.
***A adefined contribution plan***
Defined benefit plans promise participants a specific monthly lifetime benefit amount when they reach retirement. A benefit formula is created that targets a level of retirement income that can be supported by your desired annual contribution level (subject to IRS limits). Then contribution are calculated and adjusted annually to ensure that the target goalis reached. Contributions for all plan participants are kept in a single account that is used to pay the promised benefits.
Defined benefit plans tend to favor long service, highly compensated business owners, partners and key employees who are in their peak earning years. Also defined benefit plans can be especially beneficial for those who are planning on retiring in ten years or less.
The overall benefit of defined benefit plans are clear
Higher contribution limits: The contributions can be significantly higher than those of other business retirement plans. Also defined benefit plans can help those closing in on their retirement grow their nest egg quickly.
Tax deductions: The contributions you usually make are generally tax 100% tax deductible. This can translate into big tax savings now and in the future as retirees often pay taxes at alower rate than they did during their career.
Targeted retirement income: Plan contributions can be adjusted each year based on investment results to help you reach your retirement savings goal.
More investment options: Open the door to safe and high-yield investments such as land banking and real estate investment trusts (REIT’s).
These types of secure alternatives often significantly out perform the stock market and bond market portfolios.
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