Michael Gray interviews Phil Price, EA (a retirement plan administrator) for Financial Insider Weekly about retirement plans small businesses can set up for their employees. Part 1 of 3 focuses on the types of plans available….(read more)

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Retirement Plans for Closely Held Businesses

Part 1 of 3

Closely held businesses, also known as family-owned businesses, are unique in that they are typically owned and operated by a single family or a small group of individuals. retirement planning for these businesses presents unique challenges and opportunities.

Why Plan for Retirement?

retirement planning is essential for all businesses, regardless of size. However, it is especially important for closely held businesses. Retirement plans are used to provide income for employees and business owners during retirement, and they can help businesses attract and retain qualified employees.

Additionally, retirement plans often provide tax benefits to the business and its owners. Contributions to retirement plans are tax-deductible, and earnings on the investments in these plans grow tax-free until they are withdrawn during retirement. This can help lower the tax liability for the business and its owners.

Types of Retirement Plans

There are several types of retirement plans available for closely held businesses. The most common plans include the following:

1. 401(k) Plans

A 401(k) plan is a defined contribution plan that allows employees to contribute a portion of their salary to the plan. Employers can also make contributions to the plan on behalf of their employees. The contributions are invested in mutual funds or other investments, and the earnings grow tax-free until they are withdrawn.

2. SIMPLE IRA Plans

A SIMPLE IRA plan is a type of retirement plan that is available to small businesses with fewer than 100 employees. Employees can contribute a portion of their salary to the plan, and employers are required to make either a matching contribution or a non-elective contribution. The contributions are invested in mutual funds or other investments, and the earnings grow tax-free until they are withdrawn.

3. SEP Plans

A SEP plan is a type of retirement plan that allows employers to make contributions to a retirement account for themselves and their employees. Contributions are tax-deductible to the business, and the earnings on the investments grow tax-free until they are withdrawn.

4. Defined Benefit Plans

A defined benefit plan is a type of retirement plan that promises a specific benefit amount to employees upon retirement. Employers are required to make contributions to the plan to ensure that the promised benefits can be paid out. These plans are more complex and costly to administer than other types of retirement plans.

Choosing the Right Plan

Choosing the right retirement plan for a closely held business can be challenging. It is important for business owners to evaluate their goals and objectives, as well as the needs of their employees, before making a decision. Consulting with a financial advisor or retirement plan specialist can also be helpful in determining the right plan for the business.

In Part 2 of this series, we will discuss the benefits and drawbacks of each type of retirement plan, as well as the contribution limits and other rules that apply to each plan.