Brooklyn's Progress
April/May 2007

BY HAROLD EGELN

"There are several ways for a business owner to accumulate funds for retirement—taxable and tax deductible," said Steven Musmanno, a partner in Professional Planning Services, LLC at the "Tax Shelters for Small Business Owners: Managing Your Tax Burden in 2007" seminar presented by the Brooklyn Chamber of Commerce's Small Business Seminar Committee in cooperation with the Brooklyn Business Solutions Center on Feb. 21.

Noting that 65% of Americans are under-funded for retirement, Mr. Musmanno said business owners should look at defined contribution plans as a way to increase savings for retirement and to shelter earnings from taxes. "For each dollar contributed to the qualified plan, the government funds 30 to 40 cents for retirement through the available tax deduction," he pointed out.

Examples of various defined contribution plan types include the following: 401k, Simple IRA/401k, SEP IRA/KEOUGH, Profit Sharing Plan, Individual 401k, and Money Purchase Plan. Defined contribution plans are very flexible for businesses and especially ideal for a young company because they depend on employee contributions, with the employer providing a very small percentage in matching funds, explained Mr. Musmanno. He added that it is the employee, and not the employer, who bears the investment risks.

According to Mr. Musmanno defined benefit plans such as the 412(i) are back in vogue in the business community. "The advantage of a traditional DB plan is that they can provide larger deductible contributions for employers and large benefits to older employees over shorter periods of time." In addition the 412(i), which is funded by a combination of life insurance and annuity assets, has higher deductible limits than traditional defined benefit plans.

Christopher Yorke, vice president, regional sales director, Citigroup Global Markets, Inc. stressed that it is important for small businesses to keep abreast of tax laws because they affect retirement benefits, especially the Pension Protection Act of 2006, which has key defined contribution plan provisions. "The reason why Congress is changing the tax rules is to better manage savings in retirement. People are now living almost as long in retirement as when they worked," said Mr. Yorke.

Under the new tax law, employee participation and benefits for the defined contribution plans include: automatic enrollment for employees, increased contribution limits to 401(k)s, catch up contributions, and permanency of Roth 401(k) plans through the Economic Growth and Tax Relief Reconciliation Act of 2001.

"This automatic enrollment is a big change in the rules. Small business owners will love it and it will be popular because it allows for increased participation [up to $45,000 for 2007],” in a 401(k) plan, said Mr.Yorke.

To learn more about growing your retirement dollars, contact Daniel Fisher, director, financial services, Brooklyn Business Solutions Center at 718-875-1000 ext. 114, or at dfisher@brooklynchamber.com.