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Weighing Retirement Plans

(August 2005) posted on Mon Aug 08, 2005

Its a balancing act: Offering a retirement plan to meet the needs of the company and employees.


By Marty McGhie

One of the most difficult challenges facing all businesses, large
or small, is dealing with employee benefits. After all, the mix of
benefits you devise can have a serious impact on your hiring
and employee retention, your general efficiency (because if you
have a high employee turnover, your workflow will likely suffer),
and your company's profitability.

Of the various types of benefits offered by employers, one of
the most critical to your employees is probably the retirement
plan. This is particularly true in today's economy, where employers
are feeling more and
more pressure to offer competitive
retirement plans
to their workforce. And
because employees tend to
be more mobile these days
and want to take retirement
plans with them when/if
they go, employers have to
offer a better mix of retirement-
plan options.
Whether you need to
assess your current plan or
you're evaluating the possibility of adopting a plan, it's important
that you consider all your options. To help you do so, I'll
address various plans here. Note that while some retirement
plans authorized by the IRS in past legislation continue to function,
they may no longer be adopted. For our purposes, I'll discuss
only the plan types that can still be adopted as new plans.

Individual retirement accounts

Three types of individual retirement accounts or IRAs are available.
The first is a Payroll Deduction IRA. Under this type of plan,
employees authorize the employer to deduct a specified amount
from their payroll check, which deposits directly into an IRA that
the employee has set up. The type of IRA can be either a traditional
IRA or a Roth IRA:

  • A traditional IRA's contribution is tax deductible, either in
    whole or in part, depending on IRS limitations based on your
    adjusted gross income. The amounts earned in the employee's
    IRA are not taxable until they are distributed at a later eligible
    retirement date.
  • The Roth IRA works just the opposite. The contribution is not
    tax deductible, but the distributions of earnings made at a later eligible
    date are not taxable as earnings.

The next type of IRA is a Simplified Employee Pension Plan
(SEP).
This type of IRA plan allows employers to make contributions
directly into their employees' IRA accounts, as well as the
employer's own IRA account. Under this type of plan, only the
employer can contribute.


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