From the January 2007 issue of Boomer Market Advisor • Subscribe!

Simple facts for boomer business owners

In the right situation, a basic, easy-to-execute plan like a Savings Incentive Match Plan for Employees or a Simplified Employment Plan might make sense. The type most appropriate for your boomer clients will depend on their individual circumstances. Both are similar to qualified retirement plans -- like a 401(k) plan -- but not identical.

One advantage of a SIMPLE plan, in particular, over a 401(k) plan is just as the name suggests -- simplicity, especially in the area of plan administration.

"All you really have to do is fill in the blanks in the application process," says Arthur Kroll, professor of defined compensation at New York-based Baruch College.

In addition, IRS testing and compliance requirements are less stringent than in the case of 401(k) plans.

"The nondiscrimination requirements of 401(k) plans are very complex and often result in highly compensated employees having to reduce the amount that they contribute," Kroll says.

"The first thing that would steer me to a SIMPLE or SEP plan would be if a client were looking for a plan that's easy to establish and administer, has low costs and reporting requirements, and rules that are straightforward," agrees Joseph R. Birkofer, CFP, principal of Legacy Asset Management in Houston. "By contrast, qualified retirement plans can be incredibly powerful savings tools, but they require an ongoing commitment of cash flow to fund the plan, annual review by an actuary, and considerable filing and record keeping by a third-party administrator each year.

Making the choice

SIMPLE IRAs have certain advantages over SEP plans. The SIMPLE may require a lower contribution from the employer, they are primarily funded with employee salary deferrals, and the employer is required to match up to 3 percent of each employee's compensation or make a 2 percent non-elective contribution of each employee's compensation. Employers are only required to include employees who have earned $5,000 or more for the previous two years. Thus, they can be more selective if they have a large number of seasonal or part-time workers.

"The upside with the SIMPLE plan is that it allows employees to put their own money into the plan," says Scott Oeth, CFP, a principal of Midwest Investment Advisors in Edina, Minn. "[This shifts] the burden of saving for retirement to the employer's pocketbook rather than the employer's largess."

Employers, he notes, can contribute up to $10,000, as can employees, which allows the employer owner to set aside a large amount of money, $12,500, for the cost of only a 3 percent match.

The SIMPLE plan also does not limit participants' deferral by any percentage of their compensation. This could be a key point for boomers who are going into a self-employment or consulting role with a modest income.

An additional benefit of the SIMPLE plan is that, because it is an IRA, when the employee terminates, the employer merely stops contributions. There are no forms to fill out; the account is portable to the employee.

However, Birkofer offers a word of caution. "The SIMPLE plan is a good plan, but it can bite you. A business owner can get tripped up when they start them, and employees can get tripped up when they leave the company. By law, you can only have one plan on the books in any given year."

In other words, if a SIMPLE plan is instituted, the business is then ineligible to offer a SEP or a profit sharing plan. Additionally, if the business owner withdraws the money or moves it within two years of opening the plan, the money is subject to a 25 percent penalty by law, more than twice the penalty of a personal IRA.

Although less practical than a SIMPLE plan and not used as frequently, the SEP offers useful benefits. SEP plans usually make the most sense for companies with high-income employers and a small number of employees.

Under this plan, the employer's contribution, whether to one or more employees, is a direct employer expense. Depending on the employer's point of view, Birkofer says, this may be seen as an advantage, especially if the company is paternalistic toward its employees and wants to provide a savings plan. But some may see it strictly as money out of their own pockets.

"SEPs are beautiful for one, two, and four-man operations with high-wage-earner employers and low-wage employees," Oeth says. "They're also great for independent contractors, which a lot of boomers are because they've been let go from companies."

But because a SEP requires the same percentage be given to all employees, it may not make sense for a business owner whose own salary is about the same or slightly bigger than his employees'. For example, a business owner with five employees, each making an average of $50,000 annually, while he makes $100,000, decides the SEP contribution will be 5 percent. The employees will have a total combined compensation of roughly $250,000. The combined contribution to the employees' accounts will be $12,500. But the owner will only receive $5,000, or 5 percent of $100,000.

However, if an employer earns $100,000 and has two staffers with employee compensation of $50,000 combined, then allowable contributions equal $5,000 for the employer and $2,500 for the two employees.

Another advantage is that a SEP can be opened as late as the employer's last tax filing date, including extensions. As Oeth points out, you can fund the tax deduction for the prior year with cash flow from the first nine months of the new year.

Whichever plan is recommended to boomer clients, the pros and cons should be weighed. Much will depend on the size of the business and the cash flow available for retirement savings. Both plans allow for the employers' savings to be tax deferred, as in a personal IRA. The earnings on their employees also are tax deferred. Employers and employees receive an immediate tax reduction. Importantly, both plans also can help to attract employees to work for the owner by providing relatively inexpensive retirement benefits.

Finally, IRA-based retirement plans offer the same estate planning features as traditional IRAs. That is, you can defer withdrawals up to age 70 1/2; leave proceeds to your spouse or children, or consolidate them with other IRAs.

For more information on IRAs and retirement planning, please visit "The IRA rollover expert" and "After the storm" at our Web site, .

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