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Fortunately, there is no shortage of retirement plan options available to business owners; however, it does require a clear understanding of their particular business and personal financial situation in order to choose the best option. All of these plans offer similar opportunities to achieve current tax savings while growing retirement assets tax-deferred. However, each has specific costs, limitations and requirements ranging from simple and inexpensive to complex and pricey; so, it’s important to match the right retirement plan option with your specific business and personal needs and priorities for optimum results.
Here is a brief overview of the retirement plan options designed for small businesses:
For businesses with only one or two employees.
Easy to establish. Requires one simple form (5305-SEP)
Low cost, no fuss administration. Because employee accounts are self-directed, there’s no need for a plan administrator.
100% Employer contributions (not mandatory). This not only simplifies plan management, it can provide the incentive to boost productivity. Contributions are not mandatory, so if there are no profits, there’s no contribution. When profits increase, employees can be rewarded.
Large contributions. The maximum contribution limit is 25 percent of your net income up to the contribution cap of $55,000 in 2018(indexed). An equivalent percentage contribution must then be made to employee accounts.
Employers make 100 percent of contributions to all employees. For businesses with one or two employees, this shouldn’t be a huge hurdle; but if you plan to add many more employees, it can become more expensive than other plan options.
SIMPLE IRA (Savings Incentive Match Plan for Employees IRA)
For businesses with 100 or fewer employees
Easy to establish. If you want to control where your employees invest their funds, file form 5035-SIMPLE. If you want them to choose their own investments, file form 5034.
Low cost, no fuss. Employees make their own contributions.
Big Contributions. All employees can contribute up to $12,500 (2018). A “catch-up” provision allows employees age 50 or older to contribute $15,500.
Employer matches are tax deductible. An employer can match employee contributions of up to 3 percent of their total compensation and it is fully tax deductible as a business expense.
Mandatory employer contributions. The employer must make a matching employee contribution whenever making a contribution to his or her own SIMPLE IRA.
Small Contributions. Smaller than a SEP IRA or Solo 401(k), but still larger than an individual IRA.
Solo (Individual) 401(k)
For business owners with no full-time employees
Big Contributions. As an “employee” the business owner may contribute up to $18,000 (2017) and an additional $6,000 for employees 50 or older.
Profit Sharing component. A profit sharing component allows employers to contribute up to 25 percent of their net income (up to $54,000 in 2017 in years when they have a profit. The profit sharing contribution is capped at 20 percent when you combine it with the “employee” contribution of $18,000.
Even bigger contributions. If you employ your spouse, he or she may make an employee contribution up to $18,500 ($24,500 for age 50 or older). And your spouse is also eligible for the profit sharing contribution (up to 20 percent of his or her compensation)
More cost and fuss. A Solo 401(k) may require a plan administrator; however, costs associated with administering the plan is a fully deductible business expense.
IRS Reporting. Each year your combined plans exceed $250,000 you will need to file form 5500.
The best retirement plan option for small business owners is the one that can meet both their personal financial objectives and their business goals. Knowing where your business is headed is important for choosing a plan option that can be sustained for the long-term. As with any tax-related issue, it’s highly advisable to seek the guidance of a tax professional experienced in qualified retirement plans when exploring your options.