Why a Every Business Owner Should Have a Qualified Retirement Plan
Unlike a non-qualified plan, a QRP, Qualified Retirement Plan, under Section 401(a) of the Internal Revenue Code, is eligible for certain specified tax benefits. The plan is established for and on behalf of the business’s employees.
Two Types of QRP
Qualified retirement plans come in two types, defined benefit and defined contribution. They have different rules and procedures, and employers make the decision on which to offer. The key differences of the two types are as follows:
- Benefits are paid based on length of employment and salary history.
- They are often referred to as pension plans.
- Employees can withdraw their benefits as monthly payments or as a fixed lump sum.
- The employer is responsible for all the investment risk and planning.
- If the employee dies, the spouse is often entitled to benefits.
- Employees can invest their pre-tax money in approved capital markets such as stock exchanges, and their gains will grow free of income taxes until withdrawal.
- The two most popular defined contribution plans are the 401(k) and the 403(b).
- Unlike the guaranteed income of the defined benefit plans, the defined contribution plans allow the employees to make the decisions and there are no guarantees as to growth or eventual value. Employee participation is both voluntary and self-directed.
Now that the differences are clear, why should every business have a QRP in their business plan?
Benefits of QRP Plans
In general, a Qualified Retirement Plan allows the employer to deduct the contributions they make on behalf of employees. Employees may be able to defer a portion of their compensation, reducing their current income tax liability. Other possible benefits depending on the plan type chosen the allowed and adopted rules include:
- The QRP has fewer limitations on what can be done, as the non-qualified plans have more limitations built into the plans, what you can invest in, and how and when the money can be accessed.
- Contribution limits are much higher than for an IRA. Rather than a $6,000 to $7,000 limit for an IRA, contributions to a QRP can be as much as $56,500 in the tax year.
- QRPs can allow alternative investments other than just stocks, mutual funds, and bonds. If structured for it, investors may be able to invest in alternative assets including:
- Precious metals
- Real estate
- Commodities and futures
- Commercial property
- Tax lien certificates
- Contracts of sale
- Other assets
- The plan can be structured to allow borrowing against its value.
- There is more flexibility to adjust the amount of contributions.
- The business owner of the plan can assign anyone as trustee, including themselves. The trustee has checkbook control of the plan assets, as well as control over what assets in which to invest.
- The ability to roll over other types of retirement accounts into a QRP allows the business owner to consolidate their retirement plans to reduce time and money spent in plan management.
- The employer owner of a QRP can leave the plan to an heir with the same tax benefits, allowing the growth of assets tax free for a lifetime.
Every business owner should plan for a QRP as their business grows and prospers. It is smart taxwise and for employee good will.