Company-based plans

If you work for a for-profit company, you may have access to a 401(k) plan,
which typically allows you to save up to $16,500 per year (for tax year 2011).
Many nonprofit organizations offer 403(b) plans to their employees. As with
a 401(k), your contributions to 403(b) plans are deductible on both your federal and state taxes in the year that you make them. Nonprofit employees can
generally contribute up to 20 percent or $16,500 of their salaries, whichever
is less. In addition to the upfront and ongoing tax benefits of these retirement
savings plans, some employers match your contributions.
Older employees (defined as being at least age 50) can contribute even more
into these company-based plans — up to $22,000 in 2011. Of course, the challenge for many people is to reduce their spending enough to be able to sock
away these kinds of contributions.
If you’re self-employed, you can establish your own retirement savings
plans for yourself and any employees that you have. In fact, with all types
of self-employment retirement plans, business owners need to cover their
employees as well. Simplified employee pension individual retirement accounts
(SEP-IRA) and Keogh plans allow you to sock away about 20 percent of your
self-employment income (business revenue minus expenses), up to an annual
maximum of $49,000 (for tax year 2011). Each year, you decide the amount
you want to contribute — no minimums exist (unless you do a Money
Purchase Pension Plan type of Keogh).
Keogh plans require a bit more paperwork to set up and administer than
SEP-IRAs. Unlike SEP-IRAs, Keogh plans allow vesting schedules that require
employees to remain with the company a number of years before they earn
the right to their retirement account balances. (If you’re an employee in a
small business, you can’t establish your own SEP-IRA or Keogh — that’s up to
your employer.) Many plans also allow business owners to exclude employees
from receiving contributions until they complete a year or two of service.

If an employee leaves prior to being fully vested, his unvested balance
reverts to the remaining Keogh plan participants. Keogh plans also allow for
Social Security integration, which effectively allows those in the company who
earn high incomes (usually the owners) to receive larger-percentage contributions for their accounts than the less highly compensated employees.
The logic behind this idea is that Social Security taxes and benefits top out
after you earn $106,800 (for tax year 2011). Social Security integration allows
higher-income earners to make up for this ceiling.
Owners of small businesses shouldn’t deter themselves from doing a retirement plan because employees may receive contributions, too. If business
owners take the time to educate employees about the value and importance
of these plans in saving for the future and reducing taxes, they’ll see it as a
rightful part of their total compensation package.