Nobody's getting any younger. But if you own a small business and you're older than most of your employees, you may be able to max out on your retirement plan and jump-start your nest egg. That's especially true if your company doesn't have a retirement plan in place or you haven't been able to max out on plan contributions.
Strategy: Add an age-weighted feature to a profit-sharing plan. The concept is similar to a target benefit plan (see 4/4/05 issue).
As long as you meet certain requirements, you can use age (as well as compensation) to allocate retirement-plan contributions among the participants.
Apply an 'age-weighted' plan
The basic rules and regulations that apply to regular profit-sharing plans also apply to age-weighted plans. Your plan can have a discretionary formula that gives you, the employer, more flexibility than usual. You can even skip contributions in a year altogether if you choose.
Because you factor employees' ages into the formula, this plan generally favors older employees who have less time to accumulate funds for retirement than younger employees.
The contributions are calculated using the present value of a single life annuity at a specified "testing age." This ensures that the plan meets nondiscrimination rules.
Example: Age before beauty. Let's say you're a 50-year-old small business owner with six full-time employees, including yourself. Your company makes a $39,000 annual contribution to the plan based on a testing age of 65. As a result, the company allocates contributions among the employees (A to F) as cited in the box at left.
As the highest-paid and oldest employee (Employee A), you receive almost two-thirds of the total contribution ($24,457), based on an "allocation factor" that's related to your age. (Talk to your tax pro about the details.)
In contrast, consider how you'd fare under a traditional profit-sharing plan based strictly on compensation: Since your compensation is one-third of the payroll, you'd be entitled to one-third of the annual contribution, or $13,000. The age-weighted plan cited in the box at left nearly doubles that amount!
Note that the interest rate assumptions must fall within certain tax-law guidelines. Your tax pro can handle the nitty-gritty.
Tip: Another version of a profit-sharing plan that can benefit older workers is a new "comparability" plan. In that plan, the contribution percentage formula for one category of participants is greater than the other categories. Again, consult with a tax pro for more details.