BY LINDA M. CONRAD
Saving for retirement isn’t the first
thing people think of when starting a new
business. Business owners often focus on
growing their business.
Sometimes, business growth takes priority
over retirement savings. Owners think
they can rely primarily on the business to
provide for their retirement needs. As a
result, some business owners are not saving
enough for retirement. As a business owner,
you have the power to make choices when it
comes to saving for your retirement. There
are quite a few different retirement options
available that are specifically designed for
small businesses. This article explores three
options for retirement saving:
A Simplified Employee Pension (SEP)
IRA may be the right option if retirement
contribution goals are more modest or if
there are little or no long term employees.
Setting up a SEP involves very little
paperwork.
Since setting up a SEP is easy, there
aren’t many administrative costs. Contributions
are not mandatory from year to year.
Any employee who has earned $550 or more
in three of the last five years participates in
the plan. The SEP can only accept contributions
by the business. Contribution limits
are 25 percent of W-2 wages or 20 percent
of self-employment earnings.
The one rule to keep in mind is that you
can’t contribute a higher percentage to your
account as owner than what is contributed
for your employees. This can become an
expensive option if you add employees and
want to keep your contributions high. You
can set up a SEP IRA for a year as late as
the due date (including extensions) of your
business’s income tax return for that year.
A Savings Incentive Match Plan for
Employees (SIMPLE) IRA is a basic plan
for those employers who want to offer
401(k) savings and who have less than 100
employees. Like the SEP, a SIMPLE IRA
is easy to set up. Businesses must offer a
matching contribution of up to 3 percent
of each qualifying employee’s pay, or a
straight 2 percent regardless of employee
contribution.
Employees can choose to defer up to
$12,500 of their income, and those 50 and
over are able to kick in an additional $3,000.
Employees who have earned at least $5,000
a year with the business in any two years
before the current calendar year must
be included in the plan. If owners have
employees, this is a nice low-cost option
with the downside of not allowing as much
pre-tax savings.
Accounts for a SIMPLE IRA must be
opened by Oct. 1, so if you’re looking for a
way to cut your tax bill for 2015, there’s still
time with a SIMPLE IRA.
A SOLO 401(k) for a self-employed individual
or the owner of a very small business
can be a great way to boost your retirement
savings. This plan maximizes retirement
contributions by allowing the owner to put
aside the standard employee contribution
of $18,000 a year (up to $23,000 for those 50
and over) and the employer can put up to
an addition 25 percent with a total annual
contribution limit of $59,000.
You don’t have to contribute a set amount
to a Solo 401(k) each year, so you can
contribute less if you have a tough year or
more if you have a good year. Additionally,
employee contributions can be designated
as a Roth 401(k) which will enable participants
to have their contributions taxed
up-front, with tax free withdrawals in retirement.
You have until December 31 to set up
a Solo 401(k).
Unlike the other two options discussed
above, the Solo 401(k) will cost you some
money to set up and maintain, especially
because you have to pay administration fees
since the Solo 401(k) is more complicated
than the IRA options. Additionally, you may
be required to report your benefits through
form 5500 annually.
As you can see, there are many retirement
options for small-business owners. Understanding
the differences in the plan types is
important. If you have been operating a plan
that doesn’t match your business needs,
you could be missing out on important tax
benefits, or possibly making mistakes with
respect to employee contributions.
To make the most of your retirement savings
opportunity – both for yourself and your
employees – make sure it’s the right plan for
your small business before you set one up.
Conrad is a senior benefits specialist at
Marvin and Company PC.
Photo Courtesy Marvin and Company PC