The 2008 stock market decline left many re-evaluating their investment objectives after their accounts rapidly deteriorated. One consequence of the market pullback was a reduction in retirement savings throughout the country, whether through large corporate pension plan losses or poor planning in individual retirement accounts.
Retirement accounts are an important investment vehicle. You will generally need at least 70% of your pre-retirement income to maintain the same standard of living once you stop working. Therefore, smart planning is essential. A suitable plan can alter your quality of life in the long term.
Today, there are more incentives to start a retirement plan than ever before. Tax law changes have increased the amounts that can be contributed, tax credits for contributions and administration costs are available, and technological improvements have made it easier to administer the account. Even if you have an existing plan, review and update it periodically to keep up with any changes. Profit margins are decreasing for doctors across all sectors due to malpractice insurance, lower reimbursements, and less discretionary income for elective surgery. Retirement savings and a proper plan selection may help increase tax deductions. As plan investments grow tax deferred, the plans assets can grow more quickly than nondeferred investments. In addition, the right plan may help attract and retain valued employees and ensure a financially secure retirement.
CHOOSING A RETIREMENT PLAN
Deciding on a retirement plan for your practice is a big step. There are a wide variety of different retirement plans that can be established. These plans may appeal to employers based on a variety of factors, including the amounts that can be contributed, an employer’s ability to commit to a contribution, and employee demographics. There are three basic types of tax-favored retirement plans to sponsor:
(Simplified Employee Pension):
Contributions are made at the employer’s discretion based on a percentage of each eligible employee’s pay. Yearly contributions are not required. A SEP IRA is a less expensive alternative to other plans as there is less administration involved. The 2012 maximum contribution is 25% of compensation or $50,000, whichever is less.
This plan is only for practices with 100 or fewer employees who do not sponsor any other retirement plan. It allows employees to contribute to the plan from their salary and requires an employer contribution as well. Employees can contribute up to $11,500 plus $2,500 in catch-up contributions for those older than 50. The employer matches the employee dollar for dollar up to 3% of compensation. This can be reduced to 1% in 2 out of 5 years, or the employer makes a 2% of pay contribution for all eligible employees.
This type of plan allows employees to contribute from salary, but does not require an employer contribution. Each employee can contribute the lesser of 100% of compensation or up to $17,000 in 2012 plus a $5,500 catch-up contribution for those aged 50 and older.
A traditional profit sharing plan is funded by an employer with funds up to the lesser of 25% of compensation or $50,000. When a contribution is made to a traditional profit sharing plan, each eligible employee generally receives the same percentage. Nontraditional profit sharing plans permit an employer to skew the contributions so that certain employees or employee groups receive different percentages. This allows key employees to receive higher contributions.
Defined Benefit Plan:
This plan promises participants a specific monthly benefit at retirement. The employer funds the plan each year, using an amount calculated by an actuary based on the participant’s age, compensation, and length of service. Contribution amounts may be significantly higher than the contributions that can be made to other retirement plans. The 2012 limit on the annual benefit is $200,000.
These plans are highly specialized, and, if selected and administered properly, they can set you and your employees up for their future.
This article was written by Financial Advisor Kimberly Breslauer, together with the assistance of the Retirement Services Department of Oppenheimer & Co Inc. Her opinions do not necessarily reflect those of the firm. This article is not and is under no circumstances to be construed as an offer to sell or buy securities. The material herein has been obtained from various sources believed to be reliable and is subject to change without notice. Oppenheimer & Co Inc does not give legal or tax advice. However, our Financial Advisors will work with clients, their attorneys, and tax professionals to ensure all of their needs are met and properly executed. For more information, contact [email protected]