It’s a fact that not since the days of the Great Depression have American workers saved so little. According to the Federal Reserve report of 2005, our economy for 2006 showed a negative savings rate of minus .05%; savings numbers not seen since 1932 and 1933.
The Federal Reserve Survey on Consumer Finances for years 2001 and 2004 showed only 41% of American households saved regularly. Compare that information to 1981 when savings averaged 11% of income and credit card debt was only 4%. Credit card debt is now well over 12%; an ominous statistical switch in using disposable income.
SO WHAT CAN WE DO? If you’re an intelligent and “savvy” employer, both you and your employees can take advantage of IRS Qualified Retirement plans that have been available since the introduction of ERISA in 1974. These plans have been enhanced with the introduction of EGTRA in 2001 and the Pension Protection Act of 2006. New plans and enhanced contribution limits are now in place that can benefit you and your employees more than you are probably aware of.
You may not have started a retirement plan for yourself or your business because you thought it too costly or you didn’t have the necessary information on the variety and advantages of what is available. The purpose of this article will not be to list and explain all of the available plans with accompanying statistics “ad infinitum”. Instead I will show you the advantages of setting up a “painless ” savings plan through IRA’s, 401-K’s, SEP plans etc.. that will benefit you the employer and your employees.
HOW DO I FUND A RETIREMENT PLAN? The “painless” and smart way to set aside funds for retirement is by having money deducted from salary before FICA taxes etc. are taken out. This is called “Pre Tax” contributions. Your retirement money is deposited before you can get your “mitts” on it. This lowers your taxable income and therefore your income tax for the year. Traditional IRA’s,
(but not ROTH IRA’s) 401-K’s, 403-B’s, Keogh’s, SEP’s and SIMPLE plans, to name a few, provide the ability to make pre-tax contributions.
HOW DO YOUR RETIREMENT PLAN FUNDS GROW? In an IRA you can choose from any number of investments such as stocks, bonds, annuities or mutual funds. The return on these investments is tax deferred (not taxed the year it is earned but until you withdraw funds for retirement). That means money that would have been paid in taxes that year is instead reinvested into your retirement account. Remember, any withdrawals made before age 59 1/2 will be taxed as income and penalized at 10% of the amount withdrawn.
WHAT ABOUT COSTS? SEP plans are made for small businesses. An employer can set up individual IRA type accounts for employees to contribute to with higher limits than an individual IRA with no cost to the employer. That’s right, the employer pays nothing to set up and maintain this retirement plan for their employees. A 401-K plan does require a certain amount of start up and maintenance charges but a few providers have lower fees than the rest of the 401-K market which is a distinct advantage to the employer who sponsors this plan. This is important for companies that have a plan in place already or a company that wishes to start a new 401-K.
DO YOU DO ALL OF THIS ON YOUR OWN? Not at all! A retirement specialist can help you and your employees by guiding you in choosing the correct plan for your business. There are many considerations that require a professional’s assistance such as choice of investments, fiduciary responsibilities, education of employees regarding their participation, review of employee’s progress concerning the growth of their accounts and taking advantage of new options as they become available through the Pension Protection Act and other IRS rulings.
A good retirement professional will put you in a plan that will provide the best tax advantages for you an your company at the least cost, provide an opportunity to grow your retirement funds for those “golden years” and overall, maintain a relationship with you and your company that is beneficial for you both.
Your employees will be grateful to you for helping them to help themselves with this benefit. In the end, you and your employees will not become lumped in with government statistics consisting of those who don’t save at all but instead look forward to a more financially secure future.
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