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Retirement-plan alternatives for small business.

Small-business owners in Indiana often feel that setting up a complicated retirement plan, complete with government reporting regulations and high maintenance fees, is beyond their resources. For these reasons, small-business owners avoid taking any steps in the direction of providing for their future. This could be a costly mistake.

The bottom line is that with a little planning, you will accumulate far more after tax in retirement savings by contributing to a tax-advantaged retirement plan, rather than investing an equal amount taken as personal income from the business. But what about those complicated regulations and filing requirements? Is there any way to gain the tax advantages of retirement plans without the headache of government reporting and costly fees?

Yes. You have alternatives. The simplified employee pension plan, or SEP, could be a perfect option for your business. Simple to set up and maintain, there is little paper work associated with these plans and employer contributions are made directly into individual retirement accounts established for each participant.

Although the contributions are deposited to IRA accounts, the annual contribution limit is much higher than for a standard IRA. Up to 15 percent of compensation, to a maximum of $30,000, can be placed in a SEP-IRA account for each individual every year. Plan participants direct their own investments within the account for each individual every year. The entire plan contribution is deductible for the business.

Unlike some other plans, the annual contribution is completely flexible and may vary from year to year. This can be ideal for a company that doesn't want to get locked into a yearly obligation because of fluctuating earnings or future plans for expansion.

One offshoot of the SEP is the salary-reduction option, known as a SARSEP. This plan functions like a SEP but is funded by your employees on a pretax basis similar to 401(k) plans. Salary reductions are limited to 15 percent of compensation up to $8,994 in 1993. This limit is indexed to inflation and will increase with the cost of living. The contribution is tax deductible to the business.

SARSEPs are generally available to companies with 25 or fewer eligible employees. Fifty percent of eligible employees must agree to participate in the plan. Because the plan is funded by the employees, it can be a great way to offer retirement benefits and save for your own retirement at the same time. Additional contributions can be made to the plan by the company, with certain limitations.

If you like the idea of establishing a simple, inexpensive and flexible retirement plan for your business, check with a qualified financial adviser about how a SEP or SARSEP plan might work for you.

Andrew E. Greta is a financial adviser with Prudential Securities Inc. in South Bend.
COPYRIGHT 1993 Curtis Magazine Group, Inc.
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Greta, Andrew E.
Publication:Indiana Business Magazine
Date:Nov 1, 1993
Words:461
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