Three Easy Pension Plan Options For Small Businesses

Procrastinating about setting up a pension for your small business? Don't. Some easy options let you cheaply prepare for your retirement...and let you help employees, too.

Easy Option #1: Don't Forget About A Regular Old IRA

Here's the first thing to consider--even though it sounds like a wimp-out: Maybe you shouldn't setup a pension plan all at for your small business. Maybe you should just use an individual retirement account, or IRA, and encourage employees to do the same.

You might even specially budget bonuses for yourself and for employees that get paid at year-end when people may be thinking about tax deductions.

In 2007, an individual can contribute up to $4,000 a year to either a traditional IRA or a Roth-IRA.

That maybe doesn't seem very clever or sophisticated. But a $4,000 a year contribution grows to more than $600,000 (in real, adjusted for inflation value). That's enough to rather easily pay a $25,000 a year retirement benefit. Note that most workers will also get between $10,000 and $20,000 in social security benefits. Which means that an IRA might just be the perfect solution for many people.

Easy Option #2: Consider A SEP-IRA

Here's another easy option--a Simplified Employee Pension IRA, or SEP-IRA.

You can setup a SEP-IRA (both the plan and the worker savings accounts) by filing a bit of paperwork with an investment company like the Vanguard Group, Charles Schwab, or Fidelity. (Any of these outfits will send you paperwork that explains how to setup your SEP-IRA in, oh, about ten minutes.)

What's neat about a SEP-IRA, as compared to the easy, non-option of just going with a traditional or Roth IRA, is that you can contribute more money. Partners and sole proprietors, for example, can contribute up to 20% of their earnings to a SEP-IRA. Corporations can contribute up to 25% of an employee's annual wage to a SEP-IRA. Note that this contribution can't be more than $44,000.

A sole proprietorship business that makes its owner $50,000 a year, for example, can probably pay roughly $10,000 a year into the owner's SEP-IRA account. Continued over four decades, this annual savings amount grows to roughly $1,500,000 in adjusted-for-inflation dollars. That's a big enough balance to pay you a $62,000 a year retirement benefit.

One wrinkle about SEP-IRA plans. You generally need to cover all the adult employees of the business who've worked for you for more than three years. SEP-IRA pension plans, therefore, may be most attractive to one employee businesses and to businesses that by their nature don't employ anybody other than the owner for more than a year or two.

Easy Option #3: Go with a Simple-IRA

If neither a regular IRA or a SEP-IRA seems a good fit, you have one other easy option, a SIMPLE-IRA. A Simple-IRA works like a no frills 401(k) plan. Employees can contribute up to a set amount (typically $10,000) of their pay. Employes typically must match employee contributions 100% up to 3% of the employee wages. This sounds terribly complicated, but let me show you an example of how this works.

Suppose an employee makes $10,000. You would need to match employee contributions, dollar for dollar, up to 3% of the $10,000 in employee wages. This 3% figure equals $300. Accordingly, if the employee saves nothing out of his or her wages, you contribute nothing.

If the employee contributes $200 out of his wages, you also contribute $200. That's a dollar-for-dollar match.

If the employee contributes $400 out of this wages, you only contribute $300. In other words, you do a dollar-for-dollar match--but only up to the $300 mark.

Simple-IRAs present small business owners with a couple of neat benefits. First, you can easily and cheaply set them up. Typically you just file a bit of paperwork with an investment company. (This paperwork needs to be filed typically by October 1 of the year you want to setup the Simple-IRA for.)

A second neat benefit of a Simple-IRA is that you, the owner, can still save quite a bit of money--at least $10,000 a year--but you don't have to make big dollar contributions to all employees pension savings accounts. You only need to do the 3% match for those employees who decide to save some of their money.