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401(k)

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Is it appropriate for your business?

   No business owner would argue against the importance of planning for the future. However, the reality is that with the daily demands of running a business, long-term goals are often put on the back burner.

   Failure to plan for retirement can be devastating. That's just one reason it's so important for business owners to establish and maintain a retirement savings program. In addition to providing a nest egg for business owners, retirement plans also can help reduce business taxes and enable employers to attract and retain quality employees.

   Business owners today have a variety of choices when it comes to retirement plans. One of the most popular is the 401 (k) plan.

  A 401 (k) plan is a deferred compensation plan that allows employees to put a portion of their salary into a retirement plan. The contributions are exempt from federal and state taxation (in most states); however, they do not avoid Social Security (FICA) tax. The employer also has the option of making matching or profit-sharing contributions that are tax-deductible to the business.

   Many business owners think retirement plans such as 401 (k) s are expensive and difficult to administer; however, that is not necessarily true. With 401 (k) plans, employers are required to file form 5500 each year and pass certain anti-discrimination tests at least annually. As for the costs, increased demand for these plans has fueled competition among retirement-plan providers, resulting in lower costs to businesses.

   The 401 (k) is most appropriate for the business owner with more than 25 employees who wants to encourage employees to fund part of their own retirement pan. Any organization, such as a sole proprietorship, partnership, corporation, S-corporation or non-profit group can have a 401 (k).

   For the year 2001, employees may contribute up to $10,500 before taxes. (This amount is subject to cost-of -living adjustments.) They also may make voluntary after-tax contributions up to 10 percent of their pay. For each employee, total contributions from all sources may not exceed the lesser of 25 percent of compensation, or $30,000 per individual. However, only 15 percent of eligible compensation is deductible by the company.

   Anyone who is at least 21 years of age and has one year of full-time service is eligible to participate in the 401 (k) plan. One year of full-time service equals 1,000 hours; employees who work less than 1,000 hours may be excluded.

   Employers can choose from a wide range of investments for 401 (k) assets. Often businesses will offer several investments, enabling employees to choose how their contributions are invested. In addition, business owners may set up a vesting schedule, helping retain employees and reduce costly turnover.

   If you're considering offering a 401 (k) plan, do your homework. Consult your tax adviser, and look for a retirement-plan provider who is well-versed in the regulations. Your provider should be willing to come to your business, work with you face-to -face and explain all the options to you and your employees. Choose someone who is interested in setting up a plan that meets your needs and will be there for the long term -- in other words, someone that won't put you on the back burner.


Rob Kincaid is an Investment Representative with Edward Jones Investments at 300 Pine Street in Sandpoint. Give him a call at 208-255-7405 to learn more about retirement plans.

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