New investment option builds more than retirement security

New investment option builds more than retirement security

By Susan Rockhill, for SBT

There’s good economic news if you’re a woman who owns a small business, small office or home office: Recent U.S. Commerce Department census data shows the growth of "female-owned" businesses outpaced overall business growth by three to four times.
Further evidence suggests this trend will continue, making woman-owned businesses one of the most significant wealth-generating segments of the economy.
But there’s more. Recent tax law changes now permit small-business owners to create additional wealth through a new retirement investment option called "off the shelf" defined benefit plans. These plans not only make it easier for you to set aside more assets for retirement, but to also use retirement planning as a wealth-building strategy.
That’s very good news, especially if the early years of personal financial sacrifice have resulted in a profitable business, but left a female entrepreneur without enough tax-sheltered assets to assure a comfortable retirement.
Money growing tax-free in a defined benefit plan helps offset losses when your business – or the market – is doing poorly. The new "off the shelf" defined benefit plans offer the same tax deduction and assets sheltering as traditional customized plans, but with lower initial set-up and administrative costs.
These plans let you invest conservatively. But because age is such a significant factor in determining retirement savings, you can still "catch-up" at a faster rate through high tax-deferred contributions. And that’s especially important.
That means if you’re a high-income, self-employed individual or owner of a one-to-five-person business and over the age of 45, you can shelter up to $160,000 per year, depending on your age and income. That’s in sharp contrast to the maximum $40,000 a year other tax-deferred retirement plans allow.
Many restrictions can apply, and the size of the deduction is influenced by several variables, including your age and assumed rate of return. When launching your plan, you’ll need to account for several factors:

  • Determine how much of your current compensation you want to designate as a retirement benefit (For example, the maximum allowed benefit is $160,000 a year, and you can use up to $200,000 in compensation to calculate that.)
  • Calculate how much you’ll need to fund your retirement benefit.
  • Calculate how much you’ll need to contribute annually to reach your retirement goals.
    An investor who would benefit most from such a plan would be:
  • 45 years or older.
  • Typically earns at least $75,000 annually in one of the following ways:
  • Owns a business with five or fewer permanent employees, including the owner.
  • Is self-employed
  • Has a second occupation in which the owner works for him/herself.
  • Is considered an independent contractor rather than an employee.
  • Receives self-employment compensation from an organization or individual who is not the regular employer.
  • Expects to continue in this occupation or business for at least three more years.
  • Has sufficient income from all sources combined to afford a contribution of a substantial proportion of the earned income to a defined benefit plan each year until retirement.
  • Is part of a dual- income household where a second income provides discretionary funds for investment.

    When choosing a defined benefit plan, also keep in mind these features: Does the plan permit tax deductions for contributions up to $160,000 per year? Does it permit investments to grow tax deferred? Can investments be rolled into an IRA account at the plan’s termination in order to retain tax shelter? Are you restricted in your selection of investment vehicles? Is there a low initial set-up fee with annual administration fee under $2,000?
    The wealth-accumulating potential of the new "off-the-shelf" defined benefit plans gives small-business owners an extra incentive to beginning planning now for 2003 retirement investments.

    Susan Rockhill is the marketing director for the Wealth Management group of Metavante Corp.

    June 13, 2003 Small Business Times, Milwaukee

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