As a business owner, there are several reasons you might want to implement a qualified retirement plan for you and your employees. Not the least of which is that qualified plans provide numerous tax advantages.
In addition to the obvious tax advantages, there are many other, equally important, reasons to implement a qualified plan.
A qualified plan can aid in the recruiting and retention of key employees. A formal plan provides an extra incentive for a prospective employee to sign on with the company. Further, through the proper use of vesting schedules, a qualified plan can be an important employee retention tool.
Plan assets are also creditor-proof. The assets of the plan are not subject to malpractice lawsuits or bankruptcy rulings.
These and other advantages combine to help improve morale as the participants realize that their company provides the mechanism to help secure their retirement.
The two most common types of qualified retirement plans are pension and profit-sharing plans. A business can also sponsor an IRA or SEP (simplified employee pension plan).
There are three major types of pension plans—defined benefit, money purchase, and target benefit.
The most popular type of profit-sharing plans are 401(k) plans. Elective deferrals to these plans have increased to $19,500 for the year 2020. In addition, there is a catch-up contribution amount of $6,500 for employees who are 50 years old or older. Contributions to a profit-sharing plan are not generally required, they can be discretionary each year.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.