A defined benefit plan guarantees an annual income after you retire, and
the plan sponsor is responsible for investing to provide that income.
With a defined contribution plan, cash or stock is added to an account
in the beneficiary’s name. But the retirement income the plan provides
depends on the amount that is contributed, the way it is invested, and
the return those investments provide.
Both
types are available to small business owners, but defined contribution
plans tend to be more popular whether there’s a single beneficiary or a
number of plan participants.
Among
the defined contribution plans you may want to consider if you’re the
only participant in the plan, or if there are just two of you, are a
solo 401(k),
a
SEP IRA,
or one of the
Keogh
plans: a
profit sharing plan,
a
money purchase plan,
or a paired plan. There may also be cases when a Keogh defined contribution plan would work for you.
If you have employees, SEP IRAs and Keoghs may be in the running along with
SIMPLE IRAs,
SIMPLE 401(k)s, or traditional
401(k)s.
Should you find a plan that works well for your business but doesn’t allow you to contribute as much as you like, you can still open an IRA for yourself as well as participate in your business’s retirement plan. In fact, you may want to set up a plan to allow you and your employees to make IRA contributions through payroll deductions. If you follow Department of Labor guidelines, you’re not a fiduciary for the IRAs. That means you’re not liable for the investment choices the participating employees make.
