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Boost your savings as retirement nears

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in Small Business Tax

As you grow older, it's critical to save as much as possible for retirement. As the person who calls the shots at your company, you can be even more creative than others in saving for retirement.

Strategy: Set up a target benefit plan for your business. It's a "hybrid" plan that combines defined-benefit plan elements with defined-contribution plan elements. And the contribution formula generally provides the lion's share to older employees.

The IRS has given its official approval stamp to target benefit plans, so you can rely on tax-sheltered savings until you begin to make withdrawals.

Hit the target!

How it works: The plan must be made available to all eligible employees. The company contributes annually to the plan, based on projected retirement benefit "targets."

If investment performance doesn't meet expectations, the benefit will fall below the target. On the other hand, if the investments outperform expectations, the benefit will exceed the target. Participating employees assume the risk.

Typically, the target benefit-contribution formula is based on your compensation and years of service. (Example: a benefit of 1 percent of your pay for every year you've worked for the company.)

Contributions tend to be largest for longtime employees who are nearing retirement. Main reason: Veteran employees typically earn more than younger ones. Funding for a target benefit plan is based on current compensation. Assuming your compensation will increase over time, so will the target benefit.

Pros, cons of target plan

A target retirement plan setup offers some upsides and at least one downside:

The upsides: Your company can allocate a higher percentage of its retirement plan contributions to its older employees. Also, plan participants can direct their investments and borrow against the plan, if necessary. The IRS has established special "safe harbor" rules to protect a plan's tax-qualified status.

The downside: A target benefit plan is more complex—and likely more costly—to administer than garden-variety defined-contribution plans. It requires using an actuary or pension specialist to calculate the contributions. That's one key reason why target benefit plans aren't as popular.

Final tip: You can set up a target benefit plan in conjunction with a more traditional retirement plan. That way, the target plan can supplement regular contributions to senior employees' accounts, including yours.

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