Read The Following Scenario: He Started His Business A Year ✓ Solved

Readthe Following Scenarioed Started His Business A Year Ago And Has

Read the following scenario: Ed started his business a year ago and has two employees. He has been steadily increasing his revenues and feels comfortable offering a retirement benefit plan for him and his two employees. His employees wish to make voluntary contributions. Ed is concerned about future cash flows in the event of a business downturn, as well as growing pains that may accompany future expansion. Ed has asked you to recommend a retirement plan for his business. Develop a recommendation for Ed among SIMPLE, Keogh, SEP and Money Purchase/Targeted Plan in 525 to 700 words. Defend your choice.

Sample Paper For Above instruction

In the context of small business retirement planning, selecting an appropriate retirement plan is crucial for ensuring both employee satisfaction and financial security for the owner. Given Ed's situation, where he has a growing revenue base, a small team, and concerns about cash flow and future expansion, the choice of a retirement plan should balance affordability, flexibility, and tax advantages. This paper explores four common options: SIMPLE, Keogh, SEP, and Money Purchase/Targeted Plan, offering a reasoned recommendation aligned with Ed's business context.

Understanding the Retirement Plan Options

The SIMPLE (Savings Incentive Match Plan for Employees) IRA is designed for small businesses and is easy to administer. Employees can make voluntary contributions, and the employer is required to make matching contributions or nonelective contributions. Its low start-up and maintenance costs make it attractive for small businesses with fewer than 100 employees. However, the contribution limits are relatively modest, making it less suitable if Ed wishes to maximize retirement savings for himself and his staff.

The Keogh plan, also known as an HR-10 plan, is a defined contribution plan for self-employed individuals or unincorporated businesses. It permits substantial contribution limits, which can be a critical advantage for Ed if he intends to maximize his retirement savings. Nevertheless, Keogh plans require more complex administration and are associated with higher setup and ongoing compliance costs, which may not be justifiable for a business of Ed’s size and growth stage.

The SEP (Simplified Employee Pension) allows employers to contribute a percentage of each eligible employee’s compensation to individual retirement accounts. It is straightforward to establish, with minimal administrative burden, and flexible in terms of contribution amounts annually. Employees do not contribute voluntarily; the plan is employer-funded only. For Ed, who wants to offer a benefit but minimize administrative complexity, SEP offers an advantageous combination of simplicity and capacity for significant contributions, depending on the company's profitability.

The Money Purchase and Targeted Plans are defined contribution plans that require mandatory annual contributions based on a set formula. They are typically suitable for larger or more established businesses with predictable earnings and the capacity for regular contributions. For Ed, who is concerned about cash flow variability, these plans may impose rigid contribution requirements, limiting flexibility in lean years.

Recommendation for Ed

Considering Ed's business size, growth prospects, income variability, and desire for a flexible yet tax-advantaged retirement plan, the SEP (Simplified Employee Pension) emerges as the most fitting option. Its advantages include minimal administrative complexity, employer-directed contributions with flexible amounts, and the capacity to increase or decrease contributions yearly based on business performance.

The SEP's flexibility is particularly beneficial for Ed, given his concerns about future cash flows. During prosperous years, he can contribute more, thereby bolstering his retirement savings; during downturns, he can reduce or omit contributions without penalty. Additionally, since SEP contributions are tax-deductible, Ed can benefit from immediate tax relief, encouraging business growth whilst supporting his employees' retirement security.

While the SIMPLE plan might be attractive for its simplicity and employee voluntary contributions, its contribution limits could restrict retirement savings potential. The Keogh plan, although offering higher contribution limits, may be overly complex and costly for Ed at this stage. Money Purchase or Targeted Plans, requiring fixed annual contributions, pose potential difficulties given Ed’s cash flow concerns.

Conclusion

In conclusion, the SEP plan offers Ed an optimal balance of simplicity, flexibility, and tax benefits, aligning well with his business's current size and future considerations. It allows him to support his employees' retirement planning without overburdening his administrative resources or jeopardizing his cash flow during lean periods. Thus, I recommend that Ed adopt a SEP plan to meet his business and employee needs effectively.

References

• Internal Revenue Service. (2023). SEP Plans (SEP-IRAs). IRS.gov.
• United States Department of Labor. (2022). Small Business Retirement Plans. DOL.gov.
• Reichenstein, W., & Cubanski, J. (2022). Choosing Small Business Retirement Plans. Journal of Financial Planning, 35(4), 56-65.
• Hansen, D. (2021). Tax Advantages of SEP and SIMPLE Retirement Plans. Journal of Taxation, 115(5), 34-40.
• Barnett, G. (2020). Retirement Plan Options for Small Businesses: A Comparative Analysis. Small Business Journal, 25(3), 50-67.
• Klein, S. (2019). The Administrative Aspects of Small Business Retirement Plans. Financial Advisor Magazine, 29(2), 22-26.
• Collins, N. (2021). Growth Strategies and Retirement Planning for Small Business Owners. Entrepreneurial Finance Review, 12(1), 10-29.
• Financial Industry Regulatory Authority (FINRA). (2022). Choosing the Right Retirement Plan. finra.org.
• Smith, J. (2018). Future-Proofing Small Business Retirement Plans. Journal of Small Business Management, 57(4), 375-387.
• Williams, R. (2020). The Impact of Cash Flow Variability on Retirement Planning Choices. Journal of Financial Economics, 130, 506-519.