The Details
Now that we have given you a brief overview, let�s get into some specifics about your Defined Contribution options.� (Remember, we are leaving the Defined Benefit type of plans out of our discussion.)

• 401K � Surprise�you as an owner can now set up your own 401K plan!� The best part of the 401K plan is that you can contribute varying amounts each year, up to a $10,500 level for the year 2000.�� And, like the other plans, the allowed contributions are all tax-deferred (ah, there are fewer more beautiful terms in the English language that that one!)�you don�t have to pay any tax on it until your golden years.� However, now the rub�you can�t contribute to this plan unless you are a partnership, LCC, C Corporation or S Corporation.� If you are a sole proprietorship (or husband-wife team), you aren�t eligible.� Further, you have to have the plan formally administered...and the IRS is involved annually.� See our table for more info.

• �Simple� 401K � Congress recently made the �Simple� 401K available as an option to business owners.� The main benefit to this plan (over the regular 401K plan) is that employees don�t have to be vested to participate.� Unfortunately, there�s still nothing �simple� about it.� You still have to have the plan formally administered (translate that more time, money and hassle), along with annual IRS reporting, issuing of participant statements of accounts�and more.� (And isn�t this just what the small business person needs more of?)

• Profit Sharing � This is a plan in which� you share your business profits with your employees (including just YOU).� But you have a lot of leeway�there is no set IRS formula for determining what �profits� are.� Also, you decide each year if you want to contribute to the plan.� Further, if you don�t have profits, you don�t have to contribute (i.e., variable contributions).� Finally, it�s more flexible than a money-purchase plan (see below).� However, there are some limitations that make this plan not as popular (see our chart below)�such as a lower maximum deductible contribution.

• Money Purchase � A Money Purchase pension plan is similar to a profit sharing plan, except that the employer must contribute a certain fixed percentage of the employee�s compensation each year, no matter if you make money or lose money.� So, if you can�t make the contribution one year, you must involve the IRS as far as asking their permission to postpone it and catch up in a later year.� However, the maximum deductible is higher in this plan than in a profit sharing plan.

• Simple IRA � Although the name �simple� is still somewhat deceptive, it really is a much simpler alternative than the �Simple 401K.�� The Simple IRA allows you (and your employee) to contribute up to $12,000 a year ($6,000 from the employee and $6,000 from the employer).� You have a lot of flexibility on what amounts to contribute�but you must contribute to this every year once you start it.� Further, the administration is very easy and doesn�t require any IRS filings.� This is reason enough to consider this!� (Again, more facts below.)

• SEP IRA � This plan was very popular with small business owners until the Simple IRA came into existence.� Basically, the SEP IRA is similar to the Simple IRA, except that contribution limits are much higher with this type of plan.� For example, you can contribute up to $30,000 a year (or about 13% of earned income, whichever is lower).� It still also avoids IRS filings.� However, you are required to make contributions to this plan every year.� Also, only the employer (you) contributes to this plan.

Sum It Up