Small
Business and Self-employed Plans
SEP IRAs
are Simplified Employee Plans, where
employers set up separate IRAs for each employee. Contributions, however,
are much larger then your traditional IRAs; SEP IRA owners can contribute up
to 25% of compensation, capping at $44,000 in 2006. Contributions are vested
when funded.
SIMPLE IRAs
are Savings Incentive Match Plans for
Employees. A traditional IRA is set up by a small employer on behalf of his
employees. In 2006, employees can contribute up to $10,000 into a Simple
IRA. Catch up contributions are capped at $12,500.The employer will also
make a matching contribution based on a percentage of the employee’s wages.
Employers usually match, dollar for dollar, up to 3% of the employee’s
compensation. There are also other matching options available to employers.
Solo(k) plans
are pretax retirement accounts for
small business owners, their partners and families. These plans offer
significantly faster and higher contribution limits. In 2006 employees can
contribute up to $15,000 in wages. Employees age 50 and over can add another
$5,000 in catch up contributions. The employer can also contribute up to 25%
of the employee’s pay as profit sharing; 20% for the self-employed.
Contributions are capped at $44,000 in 2006. Distributions rules are similar
to traditional 401(k) plans.
Keogh plans
are tax deferred retirement accounts. Contributions in 2006 are subject to a
$44,000 ceiling. There are two types of plans:
- Money Purchase
Pension Plans are defined
contribution plans where the employer’s contribution percentage is fixed
when the Adoption Agreement is established. Contributions are mandatory
regardless of the company’s profit level.
- Profit Sharing
Plans are savings accounts where
a percentage of the employee’s pre-tax pay is contributed, by the
employer, to a tax deferred retirement account. Contributions are
voluntary for the company and are based on profits.
There are also Keogh
defined benefit plans with much higher contribution levels. They are,
however, more complex.
