What Businesses Need To Know About Qualified Retirement Planning


Retirement planning for businesses is an issue that poses many challenges. One of the biggest concerns when it comes to this class of retirement planning is figuring out what counts as a qualified plan. Here are 5 things an investment advisor will tell their clients about qualified retirement planning for businesses.

What Is the Plan Qualifying For?

When you offer help with retirement income planning to your employees, you probably want them to pay the lowest tax bills possible. This means setting up plans that qualify under IRS rules for special tax treatment. Generally, qualified plans allow an employee to push liability for the taxes off to later dates. As long as they take the money out after they a specified age, such as 59.5 years for a 401(k) plan, they won't face any penalties. There may also be some special conditions when they can do penalty-free withdrawals to pay for things like medical expenses.

Defined Benefits

Some types of qualified retirement planning for businesses will provide specific benefits. A traditional pension plan that pays out a regular benefit every month, for example, counts as a defined benefit plan. Notably, these plans require the employer to take on the risk of managing the plan and keeping it properly funded. When folks talk about pension plans, this kind of plan is usually what they mean.

Defined Contribution

A contribution plan is one where the employee has the option to pay into a personal retirement account. All the financial risk of the account sits with the employee. Most employers offer to match contributions up to a certain amount. For example, a company might offer a dollar-for-dollar match up to $5,000 each year. The employee is welcome to contribute above the limit.

Tax Deferral

The tax deferral component serves three purposes. First, it pushes the tax liability for the income off to a later date. Second, it provides for low or no withdrawal costs when the employee takes money out at the right time or under specific circumstances. Finally, it reduces the amount of current income an employee will have to count as taxable on their tax return.

Setting Up a Plan for Your Business

Within the two main types of plans, there are many different options. It's wise to meet with an investment advisor and explain to them what your business situation is. They will then help you choose a plan based on employee needs, startup costs, and potential tax benefits for your business.


14 September 2020

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