4. Small Business Plans
If you work for a small company, you may have fewer opportunities to participate in an employer-sponsored retirement plan. In fact, some studies have shown that fewer than 30% of full-time workers at small businesses are covered by a retirement plan. But there are some plans that the government has created specifically for these employers.
SIMPLEs
The Savings Incentive Match Plan for Employees, usually called a SIMPLE, is available to companies that employ fewer than 100 people. If your employer offers a SIMPLE and you earn $5,000 or more, you must be included in the plan. Also, your employer must contribute to your account following one of two formulas—either by matching 3% of the amount each participating employee contributes or by contributing 2% of each eligible employee’s compensation whether they participate or not.
There are two variations of SIMPLEs, the standard SIMPLE IRA and the SIMPLE 401(k). With a SIMPLE-IRA, all of the contributions are vested and belong to you from the beginning, so if you leave your job, you can take the money with you. You must, however, wait two years before you can move your account or withdraw any money, or you face a 25% penalty on whatever you transfer or take out, which is much steeper than the 10% that applies to other employer plans. As the name implies, the SIMPLE 401(k) is set up as a 401(k). So your contributions go into an account that’s part of the plan, rather than to an IRA.
In 2010, the contribution limit for both a SIMPLE IRA and SIMPLE 401(k) is $11,500, plus a catch-up contribution of $2,500 if you’re 50 or older.
SEPs
If your employer has 25 or fewer employees, your retirement plan may be a Simplified Employee Pension, or SEP, which is an IRA in your name. You’re 100% vested in all money in your account and you choose the investments from among those offered by the plan provider your employer selects.
You don’t contribute. Your employer makes the entire contribution, though the amount may vary from year to year. The limit is much higher than in 401(k)s or similar plans—up to 25% of your salary, or $49,000 in 2010, whichever is less. But each eligible employee must be treated the same way. If 25% of the boss’s salary is added to his or her SEP-IRA, then 25% of your salary must be added to your account.
Rules on SEP-IRA distributions are similar to those for traditional IRAs. Anyone with a SEP is required to start required minimum distributions by age 70 1/2. As with an IRA, you cannot borrow against your account balance. And if you make a SEP withdrawal before age 59 1/2, you’ll face a 10% penalty and regular income taxes on both the contributions to the account and your investment earnings—just as with a traditional IRA.
Profit Sharing and Money Purchase Plans
If your employer has chosen a profit sharing or money purchase plan, which are sometimes described as varieties of a Keogh plan, your employer can contribute the full amount to your account, up to 25% of your salary, or $49,000 in 2010, whichever is less.
In a profit sharing plan, the amount your employer adds each year depends on how well the company has done. The amount could range from $0 to the maximum, but an employer has to contribute to all employees’ accounts at the same rate. If the boss gets 25% of salary, so do you. If the boss gets 10%, you get 10%. In a money purchase plan, your employer is committed to adding a certain percentage of your salary each year—say 5%—and can contribute more if it has been a good year.
Distribution rules for these plans are standard. There are penalties for withdrawals before 59 1/2 and mandatory minimum requirements after 70 1/2. You have some flexibility when it comes to account rollovers. For example, you can roll money from other pensions or employer-sponsored retirement accounts into a Keogh. Or, as with a SEP, you can roll the Keogh itself into an IRA, without penalty. And, unlike SEP-IRAs and other IRAs, most Keoghs let you borrow from the balance in your account.
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