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What are Retirement Programs/Pension Plans available for a small closely held Corporation

By Jason Lee
Filed under: Accounting         Words in this Post: 478



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A corporation has more flexibility in setting up tax-advantaged retirement programs that allow you to invest your profits on a pre-tax basis. The amounts you are allowed to invest pre-tax are larger than an individual would be allowed in a simple IRA. ‘This is a great way to shelter your profits from taxes and set money aside for your retirement.

The two most popular pension plans for small closely held corporations are the Keogh Plan and a Simplified Employee Pension (SEP-IRA). The SEP-IRA is simpler to set up and administer, but does not allow you to contribute as much as a Keogh Plan.

A simplified employee pension SEP-IRA is a written plan that allows an employer to contribute to his or her own (if self-employed) or his or her employees’ retirement without becoming involved in more complex retirement plans (such as Keoghs). The SEP functions essentially as a low cost pension plan for small businesses.

As of this writing, employers can contribute a maximum of 25 percent of an employee’s eligible compensation or $40,000, whichever is less. Be careful not to exceed the limits; a nondeductible penalty tax of 6 percent of the excess amount contributed will be incurred for each year in which an excess contribution remains in a SEP-IRA. A potential disadvantage of a SEP-IRA is that you must also contribute to any employees you hire.

A Keogh plan is a tax-deferred retirement savings plan for small corporations and people who are self-employed and is much like an IRA. The main difference between a Keogh and an IRA is the contribution limit. Although exact contribution limits depend on the type of Keogh plan you select, in general a self-emplcyed individual may contribute a maximum of $30,000 a year and deduct that amount from taxable income. The limits for IRAs are much lower.

Like an IRA, the Keogh offers the individual a chance for his or her saving to grow free of taxes. Taxes are not paid until the individual begins withdrawing funds from the plan. Participants in Keogh plans are subject to the same restrictions on distribution as IRAs, namely distributions cannot be made without a penalty before age 59′/2 and distributions must begin before age 70′/2. A Keogh requires a little more paperwork to set up, but this can be done by any competent brokerage firm or financial advisor.

One company that has made a specialty of setting up these plans and working with small businesses in other ways is American Express Financial Services. You can read about their services online at finance.americanexpress.com. Just click the Financial Services tab, then select Retirement. Even if you decide not to use American Express, this website has some great information to help you understand your retirement choices. If you want to compare costs and services, most large insurance companies have services that set up these accounts. Additionally, most stockbrokerage firms also provide this service.

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Author: Jason Lee

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