Retirement Income

Small-Business Ownership: Funding retirement needs

Small-business owners are concerned about their future retirement lifestyle. At the same time, today's employees are very aware of the value of retirement benefits. If you currently don't offer a retirement plan, you may very well be at a disadvantage in the competition to recruit and retain talented employees.

Of course, not every plan will suit your needs. If you don't offer the most appropriate one, you may impair your ability to accumulate sufficient assets to provide adequate retirement income for yourself and your family.

Many small-business owners try to solve the challenge of recruiting and retaining employees and meet their own personal retirement income objectives with a tax-qualified retirement plan of one kind or another (for example, 401(k), SEP, SIMPLE, profit-sharing, or defined-benefit pension plans). In general, tax-qualified plan participants enjoy a combination of income tax and asset protection benefits that is not available with other retirement arrangements. Your business would be entitled to a current income tax deduction for amounts contributed to a qualified plan, while you and your employees are not taxed on these amounts or any investment earnings on these amounts until the benefits are actually received. Benefits are paid from a separate trust that is beyond the reach of business creditors.

These are very desirable features. There are, however, some tradeoffs-namely adherence to the following tight legislative guidelines:

• All eligible employees must be covered.
• Little special treatment can be provided for key employees.
• New employees must be allowed to enroll after a short waiting period.
• Plans must provide quick, if not immediate, vesting of assets.
• Employer and employee contributions are limited.
• Tax penalties are imposed on distributions made before age 59½, unless an exception applies.

These qualified plan characteristics can be particularly limiting and troublesome for you and your higher-paid employees. Contribution limits on tax-qualified plans may also hinder you or your employees from accumulating adequate funds for a comfortable retirement. Your business could find itself in the position of providing overly generous benefits to your rank-and-file employees in order to increase the benefits available to you and your higher-paid key people.

For these reasons, you may wish to consider the use of "nonqualified" arrangements:
Life Insurance is issued by The Prudential Insurance Company of America, Newark, NJ and its affiliates.