Resolving Projected Income Shortfalls: Bridging the Gap

Resolving Projected Income Shortfalls: Bridging the Gap

Presented by Jared Daniel at Wealth Guardian Group

What is a projected income shortfall?

When you determine your retirement income needs, you make your projections based on the type of lifestyle you plan to have and the desired timing of your retirement.  However, you may find that reality is not in sync with your projections and it looks like your retirement income will be insufficient for the rate you plan to spend it. This is called a projected income shortfall. If you find yourself in such a situation, finding the best solution will depend on several factors, including the following:

·         The severity of your projected shortfall

·         The length of time remaining before retirement

·         How long you need your retirement income to last

Several methods of coping with projected income shortfalls are described in the following sections.

Delay retirement

One way of dealing with a projected income shortfall is to stay in the workforce longer than you had planned. This will allow you to continue supporting yourself with a salary rather than dipping into your retirement savings.

What it means

Delaying your retirement could mean that you continue to work longer than you had originally planned. Or it might mean finding a new full- or part-time job and living off the income from this job. By doing so, you can delay taking Social Security benefits or distributions from retirement accounts. The longer you delay tapping into these sources, the longer the money will last when you do begin taking it. While you might hesitate to start on a new career path late in life, there may actually be certain unique opportunities that would not have been available earlier in life. For example, you might consider entering the consulting field, based on the expertise you have gained through a lifetime of employment. This decision may involve tax issues, so it may be beneficial to review its tax impact with a tax professional.

Effect on Social Security benefits

The Social Security Administration has set a "normal retirement age" which varies between 65 and 67, depending on your date of birth. You can elect to receive Social Security retirement benefits as early as age 62, but if you begin receiving benefits before your normal retirement age, your benefits will be decreased. Conversely, if you elect to delay retirement, you can increase your annual Social Security benefits. There are two reasons for this. First, each additional year that you work adds an additional year of earnings to your Social Security record, resulting in potentially higher retirement benefits. Second, the Social Security Administration gives you a credit for each month you delay retirement, up to age 70.

Effect on IRA and employer-sponsored retirement plan distributions

The longer you delay retirement, the longer you can contribute to your IRA or employer-sponsored retirement plan. However, if you have a traditional IRA, you must start taking required minimum distributions (and stop contributing) when you reach age 70½. If you fail to take the minimum distribution, you will be subject to a 50 percent penalty on the amount that should have been distributed. If you have a Roth IRA, you are not required to take any distributions while you are alive, and you can continue to make contributions after age 70½ if you are still working. Minimum distribution rules do not apply to money in qualified retirement plans until you reach age 70½ or retire (whichever occurs later), unless you own 5 percent or more of your employer.

Other considerations

Under the federal Age Discrimination in Employment Act, individuals 40 years of age or older are protected against employment discrimination based on age. However, employers may have legitimate concerns about hiring an individual of retirement age. Prospective employers may believe older employees will have greater health-care needs, require more sick leave, and tend to be short-term employees. You should be aware of these concerns and have a strategy for dealing with them if you plan to seek new employment after you have reached retirement age.

Save more money

You may be able to deal with projected retirement income shortfalls by adjusting your spending habits, thus allowing you to save more money for retirement. Depending on how many years you have before retirement, you may be able to get by with only minor changes to your spending habits. However, if retirement is fast approaching, drastic changes may be needed. Saving even a little money can really add up if you do it consistently and earn a reasonable rate of return. Make permanent changes to your spending habits and you'll find your savings lasting even longer.

Make major changes to your spending patterns

If you expect to fall far short of your retirement income needs or if retirement is only a few years away, you may need to change your spending patterns drastically to save enough to cover the shortfall. You should create a written budget so you can easily see where your money goes and where you can reduce your spending. The following are some suggested changes you may choose to implement:

·         Consolidate your loans to reduce your interest rate and/or monthly payment. Consider using home equity financing for this purpose.

·         Refinance your home mortgage if interest rates have dropped since you took the loan.

·         Reduce your housing expenses by moving to a less expensive home or apartment.

·         Sell your second car, especially if it is only used occasionally.

Make minor changes to your spending patterns

Minor changes can also make a difference. You'd be surprised how quickly your savings add up when you implement several small changes to your spending patterns. If your expected shortfall is minor or if you have many years before you plan to retire, making such small changes to your spending habits may be enough to correct this problem. The following are several areas you might consider when adjusting your spending patterns:

·         Buy only the insurance you really need. For example, consider canceling collision insurance on an older vehicle.

·         Shop for the best interest rate whenever you need a loan.

·         Switch to a lower interest credit card. Transfer your balances from higher interest cards and then cancel the old accounts.

·         Eat dinner at home, and carry "brown-bag" lunches instead of eating out.

·         Consider buying a well-maintained used car instead of a new car.

·         Subscribe to the magazines and newspapers you read instead of paying full price at the newsstand.

·         Cut down on utility costs and other household expenses.

·         Get books and movies from your local library instead of buying or renting them.

·         Plan your expenditures and avoid impulse buying.

Hold on to the money you save

Keep in mind that the money you save should be earmarked for your retirement. It should not be frittered away on minor expenditures and impulse purchases. The point of reducing your spending is to overcome projected income shortfalls, not to indulge yourself at end-of-season clearance sales. The money you save should be put away immediately. If you can take advantage of an IRA or other similar retirement plan, consider doing so. Any growth such a plan may experience will occur on a tax-deferred basis.

Continue saving during your retirement

Don't think of your retirement date as your deadline for saving. Instead, continue to save money throughout your retirement years. Saving may become more difficult after retirement as a result of reduced income and potentially increased medical expenses. But you can work part-time during retirement and take other steps to keep saving. Putting away just a little each month can make a significant difference in how long your money will last.

Caution:         Note that some of the powerful tax-deferred savings vehicles you took advantage of while working may no longer be available to you during retirement. To participate in a 401(k), for example, you must be employed by a company that offers such a plan and must meet the employer's eligibility requirements (e.g., length of service). IRAs only allow you to contribute earned income (i.e., job earnings) and generally don't permit any contributions after age 70½ (except in the case of Roth IRAs). So, while you can certainly continue saving during retirement, your options may be more limited.

Consider greater investment risk

If you are facing a projected income shortfall, you may want to revisit your investment choices, particularly if you're still at least 10-15 years from retirement. If you're willing to accept more risk, you may be able to increase your potential return. However, there are no guarantees; as you take on more risk, your potential for loss grows, as well. Be sure to consult your financial professional before you make any changes to your portfolio.

Make sure your level of risk is appropriate for your long-term objectives

It's not uncommon for individuals to make the mistake of investing too conservatively for their retirement goals. For example, if a large portion of your retirement dollars is in low interest earning fixed-income investments, be aware that the return on such investments may not outpace the rate of inflation. By contrast, equity investments (i.e., stocks and stock mutual funds) generally expose you to greater investment risk, but have the potential to provide greater returns.

Re-evaluate your standard of living in retirement

If your projected income shortfall is severe enough or if time is too tight, you may realize that no matter what measures you take, you will not be able to afford the lifestyle you want during your retirement years. You may simply have to accept the fact that your retirement will not be the jet-setting, luxurious, permanent vacation you had envisioned. In other words, you will have to lower your expectations and accept a more realistic standard of living. Recognize the difference between the things you want and the things you need and you'll have an easier time deciding where you can make adjustments. Here are a few suggestions:

Reduce your housing expectations

Perhaps you've always planned to live in a luxury condominium community in Palm Beach when you retire. Realize that this goal may not be realistic. If you are facing a severe income shortfall, you might have to shop around for a more affordable housing option in a less exclusive location.

Cut down on travel plans

Maybe you'd always planned an extended tour of Europe or a cruise around the world to celebrate your retirement. You may have to downgrade these plans to a driving trip to visit relatives or a train trip across the Rockies. Simple trips can be just as much fun as extravagant vacations, and they don't put as big a dent in your retirement funds.

Consider a less expensive automobile

You may dream of driving a shiny new Cadillac off the dealer's lot right after you collect your retirement gift from your employer, but shiny new Cadillacs come with big, thick payment books. Consider purchasing a used car of the type you want. If you must have a new car, think about buying a less expensive model.

Lower household expenses

There are numerous ways to decrease your everyday expenses. You might find that simply cutting back on your spending will help stretch your retirement dollar. For instance, you could eat out less often, use public transportation instead of your car, or set your home thermostats slightly lower in the winter.

Jared Daniel may be reached at www.WealthGuardianGroup.com or our Facebook page.

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.

Retirement Planning: The Basics

Retirement Planning: The Basics

Presented by Jared Daniel at Wealth Guardian Group

You may have a very idealistic vision of retirement--doing all of the things that you never seem to have time to do now. But how do you pursue that vision? Social Security may be around when you retire, but the benefit that you get from Uncle Sam may not provide enough income for your retirement years. To make matters worse, few employers today offer a traditional company pension plan that guarantees you a specific income at retirement. On top of that, people are living longer and must find ways to fund those additional years of retirement. Such eye-opening facts mean that today, sound retirement planning is critical.

But there's good news: Retirement planning is easier than it used to be, thanks to the many tools and resources available. Here are some basic steps to get you started.

Determine your retirement income needs

It's common to discuss desired annual retirement income as a percentage of your current income. Depending on who you're talking to, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity. The problem, however, is that it doesn't account for your specific situation. To determine your specific needs, you may want to estimate your annual retirement expenses.

Use your current expenses as a starting point, but note that your expenses may change dramatically by the time you retire. If you're nearing retirement, the gap between your current expenses and your retirement expenses may be small. If retirement is many years away, the gap may be significant, and projecting your future expenses may be more difficult.

Remember to take inflation into account. The average annual rate of inflation over the past 20 years has been approximately 2.5 percent. (Source: Consumer price index (CPI-U) data published by the U.S. Department of Labor, 2013.) And keep in mind that your annual expenses may fluctuate throughout retirement. For instance, if you own a home and are paying a mortgage, your expenses will drop if the mortgage is paid off by the time you retire. Other expenses, such as health-related expenses, may increase in your later retirement years. A realistic estimate of your expenses will tell you about how much yearly income you'll need to live comfortably.

Calculate the gap

Once you have estimated your retirement income needs, take stock of your estimated future assets and income. These may come from Social Security, a retirement plan at work, a part-time job, and other sources. If estimates show that your future assets and income will fall short of what you need, the rest will have to come from additional personal retirement savings.

Figure out how much you'll need to save

By the time you retire, you'll need a nest egg that will provide you with enough income to fill the gap left by your other income sources. But exactly how much is enough? The following questions may help you find the answer:

·         At what age do you plan to retire? The younger you retire, the longer your retirement will be, and the more money you'll need to carry you through it.

·         What is your life expectancy? The longer you live, the more years of retirement you'll have to fund.

·         What rate of growth can you expect from your savings now and during retirement? Be conservative when projecting rates of return.

·         Do you expect to dip into your principal? If so, you may deplete your savings faster than if you just live off investment earnings. Build in a cushion to guard against these risks.

Build your retirement fund: Save, save, save

When you know roughly how much money you'll need, your next goal is to save that amount. First, you'll have to map out a savings plan that works for you. Assume a conservative rate of return (e.g., 5 to 6 percent), and then determine approximately how much you'll need to save every year between now and your retirement to reach your goal.

The next step is to put your savings plan into action. It's never too early to get started (ideally, begin saving in your 20s). To the extent possible, you may want to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice (e.g., 401(k) plans, payroll deduction savings). This arrangement reduces the risk of impulsive or unwise spending that will threaten your savings plan--out of sight, out of mind. If possible, save more than you think you'll need to provide a cushion.

Understand your investment options

You need to understand the types of investments that are available, and decide which ones are right for you. If you don't have the time, energy, or inclination to do this yourself, hire a financial professional. He or she will explain the options that are available to you, and will assist you in selecting investments that are appropriate for your goals, risk tolerance, and time horizon. Note that many investments may involve the risk of loss of principal.

Use the right savings tools

The following are among the most common retirement savings tools, but others are also available.

Employer-sponsored retirement plans that allow employee deferrals (like 401(k), 403(b), SIMPLE, and 457(b) plans) are powerful savings tools. Your contributions come out of your salary as pretax contributions (reducing your current taxable income) and any investment earnings are tax deferred until withdrawn. These plans often include employer-matching contributions and should be your first choice when it comes to saving for retirement. 401(k), 403(b) and 457(b) plans can also allow after-tax Roth contributions. While Roth contributions don't offer an immediate tax benefit, qualified distributions from your Roth account are federal income tax free.

IRAs, like employer-sponsored retirement plans, feature tax deferral of earnings. If you are eligible, traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income (unless you've made nondeductible contributions, in which case a portion of the withdrawals will not be taxable).

Roth IRAs don't permit tax-deductible contributions but allow you to make completely tax-free withdrawals under certain conditions. With both types, you can typically choose from a wide range of investments to fund your IRA.

Annuities are contracts issued by insurance companies. Annuities are generally funded with after-tax dollars, but their earnings are tax deferred (you pay tax on the portion of distributions that represents earnings). There is generally no annual limit on contributions to an annuity. A typical annuity provides income payments beginning at some future time, usually retirement. The payments may last for your life, for the joint life of you and a beneficiary, or for a specified number of years (guarantees are subject to the claims-paying ability of the issuing insurance company). Annuities may be subject to certain charges and expenses, including mortality charges, surrender charges, administrative fees, and other charges.

Note: In addition to any income taxes owed, a 10 percent premature distribution penalty tax may apply to taxable distributions made from employer-sponsored retirement plans, IRAs, and annuities prior to age 59½ (prior to age 55 for employer-sponsored retirement plans in some circumstances).

Jared Daniel may be reached at www.WealthGuardianGroup.com or our Facebook page.

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.

Retirement Plans

Retirement Plans

Presented by Jared Daniel of Wealth Guardian Group

Introduction

As an employer, you may want to establish one or more retirement plans for yourself and/or your employees. Having a plan can provide significant benefits for both you and your employees (if any). There are many different types of retirement plans, however, and choosing the right one for your situation is a critical decision. You want a plan that will meet both your goals as the employer and the needs of any employees you may have. In addition, it is important to balance the cost of establishing and maintaining a plan against the potential benefits.

General benefits of retirement plans

By establishing and maintaining a retirement plan, you can reap significant benefits for both your employees (if any) and yourself as employer. From your perspective as an employer, one of the main advantages of having and funding a retirement plan is that your employer contributions to the plan are generally tax deductible for federal income tax purposes. Contributing to the plan will therefore reduce your organization's taxable income, saving money in taxes. The specific rules regarding deductibility of employer contributions are complex and vary by type of plan, however, so you should consult a tax advisor for guidance.

For many employers, perhaps the greatest advantage of having a retirement plan is that these plans appeal to large numbers of employees. In fact, offering a good retirement plan (along with other benefits, such as health insurance) may allow you to attract and retain the employees you want. You will save time and money in the long run if you can hire quality employees, and minimize your employee turnover rate. In addition, employees who feel well rewarded and more secure about their financial future tend to be more productive employees, further improving your business's bottom line. Such employees are also less likely to organize into collective bargaining units, which can cause major business problems for some employers.

So, why are retirement plans considered such a valuable employee benefit? From the employee's perspective, key advantages of a retirement plan may include some or all of the following:

·         Some plans (e.g., 401(k) plans) allow employee contributions. This gives employees a convenient way to save for retirement, and their contributions are generally made on a pretax basis, reducing their taxable income. In some cases, the employer will match employee contributions up to a certain level. 401(k), 403(b), and 457(b) plans can also allow participants to make after-tax Roth contributions. There's no up front tax benefit, but qualified distributions are entirely free from federal income taxes.

·         Funds in a retirement plan grow tax deferred, meaning that any investment earnings are not taxed as long as they remain in the plan. The employee generally pays no income tax until he or she begins to take distributions. Depending on investment performance, this creates the potential for more rapid growth than funds held outside a retirement plan.

Caution:         Distributions taken before age 59½ may also be subject to a 10 percent federal penalty tax (25 percent in the case of certain distributions from SIMPLE IRA plans).

·         Some plans can allow employees to borrow money from their vested balance in the plan. Plan loans are not taxable under certain conditions, and can provide employees with funds to meet key expenses. Plan loans are not without potential drawbacks, however.

·         Funds held in a 403(b), 457(b), SEP, SIMPLE, or qualified employer plan are generally fully shielded from an employee's creditors under federal law in the event of the employee's bankruptcy. This is in contrast to traditional and Roth IRA funds, which are generally protected only up to $1,245,475 (as of April 1, 2013) under federal law, plus any amounts attributable to a rollover from an employer qualified plan or 403(b) plan. (IRAs may have additional protection from creditors under state law.) Funds held in qualified plans and 403(b) plans covered by the Employee Retirement Income Security Act of 1974 (ERISA) are also fully protected under federal law from the claims of the employee's and employer's creditors, even outside of bankruptcy.

Qualified plans vs. nonqualified plans

If you are an employer who is considering setting up a retirement plan, be aware that many different types of plans exist. The choices can sometimes be overwhelming, so it is best to use a systematic approach to narrow your options. Your first step should be to understand the distinction between a qualified retirement plan and a nonqualified retirement plan. Virtually every type of retirement plan can be classified into one of these two groups. So what is the difference?

Qualified retirement plans offer significant tax advantages to both employers and employees. As mentioned, employers are generally able to deduct their contributions, while participants benefit from pretax contributions and tax-deferred growth. In return for these tax benefits, a qualified plan generally must adhere to strict IRC (Internal Revenue Code) and ERISA (the Employee Retirement Income Security Act of 1974) guidelines regarding participation in the plan, vesting, funding, nondiscrimination, disclosure, and fiduciary matters.

In contrast to qualified plans, nonqualified retirement plans are often not subject to the same set of ERISA and IRC guidelines. As you might expect, this freedom from extensive requirements provides nonqualified plans with greater flexibility for both employers and employees. Nonqualified plans are also generally less expensive to establish and maintain than qualified plans. However, the main disadvantages of nonqualified plans are (a) they are typically not as beneficial from a tax standpoint, (b) they are generally available only to a select group of employees, and ©) plan assets are not protected in the event of the employer's bankruptcy.

Most employer-sponsored retirement plans are qualified plans. Because of their popularity and the tax advantages they offer to both you and your employees, it is likely that you will want to evaluate qualified plans first. (See below for a discussion of types of qualified plans.) In addition to providing tax benefits, qualified plans generally promote retirement savings among the broadest possible group of employees. As a result, they are often considered a more effective tool than nonqualified plans for attracting and retaining large numbers of quality employees.

Tip:     There are several types of retirement plans that are not qualified plans, but that resemble qualified plans because they have many similar features. These include SEP plans, SIMPLE plans, Section 403(b) plans, and Section 457 plans. See below for descriptions of each type of plan.

Defined benefit plans vs. defined contribution plans

Qualified retirement plans can be divided into two main categories: defined benefit plans and defined contribution plans. In today's environment, most newer employer-sponsored retirement plans are of the defined contribution variety.

Defined benefit plans

The traditional-style defined benefit plan is a qualified employer-sponsored retirement plan that guarantees the employee a specified level of benefits at retirement (e.g., an annual benefit equal to 30 percent of final average pay). As the name suggests, it is the retirement benefit that is defined. The services of an actuary are generally needed to determine the annual contributions that the employer must make to the plan to fund the promised retirement benefits. Defined benefit plans are generally funded solely by the employer. The traditional defined benefit pension plan is not as common as it once was, as many employers have sought to shift responsibility for retirement to the employee. However, a hybrid type of plan called a cash balance plan has gained popularity in recent years.

Defined contribution plans

Unlike a defined benefit plan, a defined contribution plan provides each participating employee with an individual plan account. Here, it is the plan contributions that are defined, not the ultimate retirement benefit. Contributions are sometimes defined in the plan document, often in terms of a percentage of the employee's pretax compensation. Alternatively, contributions may be discretionary, determined each year, with only the allocation formula specified in the plan document. With some types of plans, employees may be able to contribute to the plan. A defined contribution plan does not guarantee a certain level of benefits to an employee at retirement or separation from service. Instead, the amount of benefits paid to each participant at retirement or separation is the vested balance of his or her individual account. An employee's vested balance consists of: (1) his or her own contributions and related earnings, and (2) employer contributions and related earnings to which he or she has earned the right through length of service. The dollar value of the account will depend on the total amount of money contributed and the performance of the plan investments.

Questions to consider when choosing a retirement plan

There are many different factors to consider when choosing a retirement plan for your company. In some cases, more than one type of plan will meet your needs in one vital area. If this is the case, you will need to further refine your choices by looking at how each type of plan meets your needs and their limitations in other key areas.

You can zero in on the key areas of importance and take the first step to finding the right plan by answering the following questions:

·         What kind of a business entity do you have? Do you have a sole proprietorship, a partnership, a corporation, a limited liability company filing a corporate return, or a limited liability company filing a partnership return? Some plans are more appropriate for certain types of business entities than for others.

·         How many employees do you have right now? How many do you expect to have in one year, three years, and five years from now? Some plans impose limits on the number of employees you can have.

·         What is your current compensation and the current compensation range for your employees? What do you expect your compensation and the compensation range for your employees to be over the next year, three years, and five years?

·         How old are you, and what is the age range for your employees? Some plans allow contributions to be allocated based on age.

·         How much do you want to put away in the retirement plan each year for yourself and/or your employees?

·         Who do you want to fund the retirement plan contributions? Just you as the employer? Just the employees? Both the employees and you as the employer?

·         If you as the employer are funding at least some of the contributions, what percentage of employee compensation do you want to contribute each year?

·         How important is it for you to minimize the amount of contributions to rank-and-file employees, as compared to those for you and other executives?

·         How stable or unstable have your company's profits been in the last few years?

·         What are the company's expected profits in the next year? Three years? Five years?

·         How important is it for you to have flexibility in the amount of retirement plan contributions you make each year, as opposed to contributing a fixed amount or fixed percentage of employee compensation regardless of the company's bottom line?

·         How important is it to you to delay vesting and employee control of contributions made by you as the employer?

·         How important is it that the retirement plan be simple to understand?

·         How important is it that the retirement plan be relatively inexpensive to set up and administer?

·         How important is it for the plan to be competitive to attract and/or retain employees?

·         How important is it to reduce the current taxable income of you and your employees through employer and employee contributions?

·         Do you have a stable workforce, or a high turnover rate among your employees?

Determine which plan meets your goals

Here is where your answers to the above questions can be utilized to determine the most appropriate and beneficial plan for your company. Every type of plan has its own advantages and disadvantages. You can find the right type of plan for your company by:

·         Seeing how they stack up against one another in certain key areas, and

·         Becoming aware of the benefits and potential drawbacks of each type of plan

To make it easier for you, we have prepared the essential information for you in more than one way. First, we have identified seven key areas that can be used to determine how each type of plan stacks up against other types of plans. In addition, we have provided a brief overview of each type of plan that links to a more detailed discussion of pros and cons and other information. Finally, we have listed types of plans that are generally considered appropriate for certain types of employers.

Tip:     In addition to your own research, it is best to have a tax advisor and other professionals help you evaluate your options and select an appropriate retirement plan.

Seven key areas to compare

You can determine the best plan for your company by first seeing how the various types of plans compare in these seven key areas:

1. Maximizing yearly contributions/building retirement benefits for you as the owner
2. Maximizing/weighting contributions for you and other highly compensated employees rather than for lower-compensated employees
3. Flexibility in making contributions each year
4. Building retirement benefits for employees
5. Using the plan as a recruiting tool to attract employees
6. Using the plan to discourage employees from seeking employment elsewhere
7. Utilizing income tax deferral on plan contributions and investment earnings to determine the right retirement plan for your organization, keep your most important goals in mind as you evaluate plans in terms of these seven key areas.

Specific types of retirement plans

·         Defined benefit plan: A defined benefit plan is a qualified retirement plan that guarantees the employee a specified level of benefits at retirement. As the name suggests, it is the retirement benefit that is defined, not the level of contributions to the plan. The services of an actuary are generally needed to determine the annual contributions that the employer must make to the plan to fund the promised retirement benefits. Contributions may vary from year to year, depending on the performance of plan investments and other factors. Defined benefit plans allow a higher level of employer contributions than most other types of plans, and are generally most appropriate for large companies with a history of stable earnings.

·         Cash balance plan: A cash balance plan is a type of retirement plan that has become increasingly common in recent years as an alternative to the traditional defined benefit plan. Though it is technically a form of defined benefit plan, the cash balance plan is often referred to as a "hybrid" of a traditional defined benefit plan and a defined contribution plan. This is because cash balance plans combine certain features of both types of plans. Like traditional defined benefit plans, cash balance plans pay a specified amount of retirement benefits. However, like defined contribution plans, participants have individual plan accounts for record-keeping purposes.

·         Simplified employee pension (SEP) plan: A simplified employee pension (SEP) plan is a tax-deferred retirement savings plan that allows contributions to be made to special IRAs, called SEP-IRAs, according to a specific formula. Generally, any employer with one or more employees can establish a SEP plan. With this type of plan, you can make tax-deductible employer contributions to SEP-IRAs for yourself and your employees (if any). Except for the ability to accept SEP contributions from employers (allowing more money to be contributed) and certain related rules, SEP-IRAs are virtually identical to traditional IRAs.

·         SIMPLE IRA plan: A SIMPLE IRA plan is a retirement plan for small businesses (generally those with 100 or fewer employees) and self-employed individuals that is established in the form of employee-owned IRAs. The SIMPLE IRA plan is funded with voluntary pre-tax employee contributions and mandatory employer contributions. The annual allowable contribution amount is significantly higher than the annual contribution limit for regular IRAs but less than the limit for 401(k) plans.

·         SIMPLE 401(k) plan: A SIMPLE 401(k) plan is a retirement plan for small businesses (generally those with 100 or fewer employees) and self-employed persons, including sole proprietorships and partnerships. Structured as a 401(k) cash or deferred arrangement, this plan was devised in an effort to offer self-employed persons and small businesses a tax-deferred retirement plan similar to the traditional 401(k), but with less complexity and expense. The SIMPLE 401(k) plan is funded with voluntary employee pre-tax contributions (and/or after-tax Roth contributions) and mandatory employer contributions. The annual contribution limits are less than the limits applicable to regular 401(k) plans.

·         Keogh plan: A Keogh plan, sometimes referred to as an HR-10 plan, is a qualified retirement plan for self-employed individuals and their employees. Only a sole proprietor or a partnership business may establish a Keogh plan--an employee or an individual partner cannot. Keogh plans may be set up as either defined contribution plans or defined benefit plans.

·         Profit-sharing plan: A profit-sharing plan is a qualified defined contribution plan that generally allows for some discretion in determining the level of annual employer contributions to the plan. In fact, the business can often contribute nothing at all in a given year if it so chooses. The amount of contributions may be based on a written formula in the plan document, or may be essentially at the employer's discretion. With a typical profit-sharing plan, employer contributions range anywhere from 0 to 25 percent of an employee's compensation.

·         Age-weighted profit-sharing plan: An age-weighted profit-sharing plan is a type of profit-sharing plan in which contributions are allocated based on the age of plan participants as well as on their compensation. This type of plan benefits older participants (generally, those having fewer years until retirement) by allowing them to receive much larger contributions to their accounts than younger participants.

·         New comparability plan: A new comparability plan is a variation of the traditional profit-sharing plan. This type of plan is unique in that plan participants are divided into two or more classes, generally based on age and other factors. A new comparability plan can often allow businesses to maximize plan contributions to higher-paid workers and key employees and minimize contributions to the other employees.

·         401(k) plan: A 401(k) plan, sometimes called a cash or deferred arrangement (CODA), is a qualified defined contribution plan in which employees may elect to defer receipt of income. The amount deferred consists of pretax dollars (and/or after-tax Roth contributions) that are invested in the employee's plan account. Often, the employer matches all or part of the employees' deferrals to encourage employee participation. The 401(k) plan is the most widely used type of retirement plan.

·         Money purchase pension plan: A money purchase pension plan is a qualified defined contribution plan in which the employer makes an annual contribution to each employee's account in the plan. The amount of the contribution is determined by a set formula that cannot be changed, regardless of whether or not the corporation is showing a profit. Typically, the business's contribution will be based on a certain percentage of an employee's compensation.

·         Target benefit plan: A target benefit plan is a hybrid of a defined benefit plan and a money purchase pension plan. It resembles a defined benefit plan in that the annual contribution is based on the amount needed to fund a specific amount of retirement benefits (the "target" benefit). It resembles a money purchase pension plan in that the annual contribution is fixed and mandatory, and the actual benefit received by the participant at retirement is based on his or her individual balance.

·         Thrift/savings plan: A thrift or savings plan is a qualified defined contribution plan that is similar to a profit-sharing plan, but has features that provide for (and encourage) after-tax employee contributions to the plan. The employee must pay tax on his or her own contributions before they are invested in the plan. Typically, a thrift/savings plan supplements after-tax employee contributions with matching employer contributions. Many thrift plans have been converted into 401(k) plans.

·         Employee stock ownership plan (ESOP): An employee stock ownership plan, a type of stock bonus plan, is a qualified defined contribution plan in which participants' accounts are invested in stock of the employer corporation. This type of plan is funded solely by the employer. When a plan participant retires or leaves the company, the participant receives his or her vested balance in the form of cash or employer securities.

·         Payroll deduction IRA plan: A payroll deduction IRA plan is a type of arrangement that you can establish to allow your employees to make payroll deduction contributions to IRAs (traditional or Roth). It can be offered to your employees instead of a more conventional retirement plan (such as a 401(k) plan), or to supplement such a plan. Each of your participating employees establishes and maintains a separate IRA, and elects to have a certain amount deducted from his or her pay on an after-tax basis. The amount is then invested in the participant's designated IRA. Payroll deduction IRAs are generally subject to the same rules that normally to IRAs.

In addition, there are two types of retirement plans that are especially popular with tax-exempt organizations:

·         Section 403(b) plan: A Section 403(b) plan, also known as a tax-sheltered annuity, is a type of nonqualified plan under which certain government and tax-exempt organizations (e.g., schools and religious organizations) can purchase annuity contracts or contribute to custodial accounts for eligible employees. There are two types of 403(b) plans: salary-reduction plans and employer-funded plans. Even though section 403(b) plans are not qualified plans, they are subject to many of the same requirements that apply to qualified plans. Like 401(k) plans, 403(b) plans can (but are not required to) allow participants to make after-tax Roth contributions.

·         Section 457(b) plan: A Section 457(b) plan is a type of nonqualified deferred compensation plan for governmental units, governmental agencies, and non-church-controlled tax-exempt organizations. It is similar to a 401(k) plan and subject to some of the same rules. Like 401(k) plans, 457(b) plans can (but are not required to) allow participants to make after-tax Roth contributions.

Retirement plans most appropriate for small businesses and the self-employed

If you are self-employed, a sole proprietor, or a partner and want to establish a retirement plan, there are five types of plans you should consider:

·         Keogh plan

·         Simplified employee pension (SEP) plan

·         SIMPLE IRA plan

·         SIMPLE 401(k) plan

·         Individual 401(k) plan        

Retirement plans most appropriate for corporations

If your form of business entity is a corporation and you want to establish a retirement plan, you should consider the following types of defined contribution plans:

·         Defined benefit plan

·         401(k) plan

·         Profit-sharing plan

·         Age-weighted profit-sharing plan

·         New comparability plan

·         Money purchase pension plan

·         Thrift/savings plan

·         Employee stock ownership plan (ESOP)

·         Simplified employee pension (SEP) plan

·         SIMPLE IRA plan

·         SIMPLE 401(k) plan

Retirement plans for tax-exempt organizations

If you are involved with a tax-exempt or government organization and you want to establish a retirement plan, your options typically include a qualified plan, section 403(b) plan, and/or section 457 plan. However, not every employer is eligible to maintain every type of plan. For example, governmental employers generally can not adopt 401(k) plans. And only certain religious, public educational, and 501(c)(3) tax-exempt organizations can maintain 403(b) plans.

Jared Daniel may be reached at www.WealthGuardianGroup.com or our Facebook page.

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.