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We all know, small business owners have many duties and work long hours. Retirement plans may be on the back burner or possibly not even on the stove at all.  Tomorrow comes fast and soon we are middle aged and have nothing to show for all the hard work we have put into our businesses over the years. 

Retirement plans not only help you secure your future on the beaches of Belize, but also help secure your employees’ futures, make your business more competitive in attracting and keeping good employees, and save you money at tax-time.   Retirement plans are simple to administer and do not take a significant amount of time start and maintain.

Most small business owners know about 401(k) plans, but there are several plans available and one of those may be more suitable for your business and retirement needs.  There are four types of retirement plans for small business owners to consider:

  1. Simplified Employee Pension Plan (SEP IRA)
  2. Savings Incentive Match Plan for Employees (SIMPLE IRA)
  3. Self-Employed 401(k) plan
  4. 401(k) plan (better for larger companies given set-up costs, administration, fiduciary responsibilities, etc.)

Our focus is on the first three types of plans since they are suitable for small businesses with 10 employees or fewer.  Each plan has different characteristics, including the ability to cover employees, contribution limits and administrative responsibilities.  In order to get the best benefits for your business, you must understand the nuances of each plan.  If you have been operating a plan that does not match your business needs, you could be missing important tax benefits or possibly administering contributions inaccurately. 

OPTIONS

Each of the three retirement plans suitable for small businesses may offer certain advantages including:

  • Tax-deferred growth potential, which will allow contributions to grow without being eaten away by current taxes
  • Potential to deduct employer contributions as a business expense
  • Tax credit of up to $500 for certain expenses incurred while starting and maintaining the plan during each of the first three years

The similarities end here, particularly with respect to which employees are covered and who is responsible for contributions.

  • A SEP IRA is for self-employed individuals and small business owners.  Contributions are made by the employer only and are tax deductible as a business expense.
  • A SIMPLE IRA is for businesses with less than 100 employees and is funded by tax-deductible employer contributions and pre-tax employee contributions.
  • A Self-Employed 401(k) is a tax-deferred retirement plan for self-employed individuals that offers the most generous contribution limits of the three plans, but is suitable only for businesses that have no common-law employees.  Common-law employees are those who have no ownership interest in the business. 

The following chart from Fidelity.com compares the three plans in detail:

IRS.gov indicates the contribution limits are the same for 2016 as they were in 2015

Fidelity’s small-business retirement plans at a glance*

CONSIDERING THE BEST PLAN FOR YOUR BUSINESS

Consider these factors in determining the best plan for you.  The number of employees you are covering, how much are contributions and who pays, how much time and money will be spent to open, maintain and administer the plan are all extremely important questions to ask yourself. 

If you and a business partner are the only two employees and you want the highest possible contribution limits, the 401(k) may be the best selection for you.  However, if you have more employees to cover, a SEP IRA or SIMPLE IRA may be more appropriate for your business.  This is dependent on whether you want to fund the plan yourself or if you want employees to be able to contribute also. 

The amount of time and money to administer any of these plans is relatively low.  The SEP IRA and SIMPLE IRA do not require annual plan filings with the IRS.  The Self-Employed 401(k) plan requires an annual form 5500 once the plan’s assets have exceeded $250,000. 

A retirement plan can set your mind at ease about the future, as well as, save you tax dollars and increase the marketability of your business.