Pensions--Planning for the Young Business Owner

You have expressed an interest in establishing a qualified retirement plan. Various types of plans are available, but in your situation, and especially at your age, a so-called defined contribution plan probably would work best for you. It should enable you to build up the largest retirement fund possible.

Different kinds of limits apply to the various kinds of qualified retirement plans. With a defined contribution plan, the main limit is to the amount that can be contributed and deducted to each participant's account for any given year. Generally, the limit is 15 percent of compensation up to $150,000 a year. (The limit is higher for a money-purchase plan, but this type of plan is less flexible, requiring contributions to be made every year.)

While contributions are limited, there is no limit to the amount of benefits you can ultimately collect from the plan. Your contributions are invested, and grow tax-deferred until withdrawn. You can continue to make deductible contributions as long as you continue working, no matter how large your account grows.

With a defined benefit plan, which is more like a traditional pension plan, there are limits to the amount of benefit you can ultimately receive (which is reduced if you decide to retire early). And deductible contributions that can be made for younger participants are smaller than are possible with a defined contribution plan.

Something else that you will probably like about the defined contribution plan is that it is easier and less costly to administer. A defined benefit plan needs periodic valuations and actuarial computations.

If you set up a defined contribution plan, it also must cover other employees of the business. However, new and younger employees will not necessarily have to receive contributions. Your plan also can be integrated with social security benefits so that a greater percentage of plan contributions go to employees above the wage base.

If you agree that a defined contribution plan may be what you're looking for, we would be happy to help you set everything up so that you can start saving taxes and protecting your future immediately.