You have successfully started your small business, sales are good and you have emergency funds. Should you start thinking about saving for retirement and lowering your taxes at the same time? Absolutely! If you have employees, you should also feel an obligation of helping them achieve their retirement dreams.
As a business owner, you will have a choice when it comes to what type of plan to set up. They all have their pros and cons.
SIMPLE IRA – The Savings Incentive Match Plan for Employees (SIMPLE) is suitable for many small businesses with fewer than 100 employees. It is easy to set up and inexpensive. You can choose what financial institution that your employees invest in or they can do so themselves. Employees are allowed to contribute up to $12,500 or $15,500 if older than age 50, as long as they make that much in wages. Employers have to contribute for each employee that meets certain requirements. The employer can choose to match employee contributions dollar-for-dollar up to a maximum of 3 percent of the employee’s salary, or the employer could choose to make non-elective contributions, contributing 2 percent of each employee’s salary into their SIMPLE IRA regardless of whether or not the employee chooses to contribute. Accounts have to be open by Oct. 1 to get the tax deduction for the year and there are steep penalties to withdrawing funds early.
SEP IRA – The Simplified Employee Pension plan is as easy and inexpensive as the SIMPLE plan but could cost you more if you have more than one or two employees. Employers make all of the contributions to a SEP plan and they are tax-deductible to the business. The contribution limits are higher also, up to $53,000 or 25 percent of salary, whichever is lower. Most SEP plans specify that you make contributions for each employee as a percentage of their salary. This could get expensive if you are adding employees since each one has to be counted in the plan.
SOLO 401k – This is a good option if your business is solely owned by you or you and your spouse. It is relatively inexpensive to set up and you can make contributions as an employee and employer. You don’t have to contribute a set amount so you can contribute more in good years and less when times are tough. You can set it up through Dec. 31 and make contributions through April 15 for the preceding year. It will cost you something to set up and, once your plan reaches $250,000 in assets, you will have to file a form 5500.
401k PLAN – The Cadillac of all the plans, the 401k, is the most widely-used and well-known of all of the plans. It offers the highest employee contributions, catch-up contributions and many options as to the design of the plan. Employers have the option of matching contributions, providing a vesting schedule and offering penalty-free loans if an emergency arises. There are more costs and paperwork associated with a 401k plan so it may only be worthwhile for a business with more than a “few” employees.
The bottom line is to talk to your financial planner and tax advisor about what kind of retirement plan they recommend for your small business. There are many factors to consider but any kind of retirement saving is better than none at all!
Barbara Trombley is an owner and financial planner with Trombley Associates in Wilbraham, MA. Trombley Associates provides independent financial services, including retirement planning, to a wide range of clients. Barbara received her undergraduate degree from Duke University and her MBA from New York University. She is also a CPA.