Whether you are your only “employee” or you have quite a few employees working for your business, there are many things that you know you need to take care of. One of those things is ensuring there are retirement plan options in place for both you and your employees. However, as a small business owner, it can be difficult to find an option that is cost effective and makes sense in your situation. To help you choose the perfect options for you business, we are going to explore some of the most popular options.
A Simple (Savings Incentive Match Plan for Employees) IRA is a great option if you have less than 100 employees who have earned more than $5,000. It is easy to set up this plan by using a form from the IRS. This plan allows your employees to choose where they want to invest their contributions. Once you set up the plan with a financial institution and notify your employees, you are ready to start.
It usually does not cost anything to set it up but even if it does, you may be able to write it off as a business expense. Since there is usually no administrator, you will not have to pay anything for maintenance, either. The contribution limits are higher than your regular IRA, too. In 2017, they are set at $12,500 with a catch up option for people over 50 of $3,000. As the employer, you are required to match either 2% of their total compensation or between 1 and 3 percent of their total pay. This contribution is tax deduction for the business.
An SEP (Simplified Employee Pension) IRA is a great option for a business with anywhere between one and three employees. After that, it can become a lot more expensive. It is just as easy as setting up a Simple IRA. There are no administrative costs associated with it and you may be able to write it off on your business taxes if there are. The maintenance is easy too. With this type of account, the employer makes all of the contributions and employees do not have to. The good thing is that any contributions made by the business can be tax deductible as a business expense.
Because of how contributions are set up, your employees can still contribute to other IRA accounts or retirement accounts. You can also use it as an incentive to help the bottom line of the business because you can run it in a way that if the business does better, you contribute more. You are also able to make larger contributions than other types of accounts and can contribute the lesser of $54,000 or 25% of net income.
A defined-benefit plan is a great way to be able to save a lot of money for retirement for your employees and yourself. It is best for small business owners who may not have many employees, if any outside of their spouse. This is because it can be very costly to manage because and actuary is needed to run the calculations. It allows you to save over $100,000 per year for retirement. It can even be combined with other retirement plans so you can save even more. The contributions can be written off on taxes for the business.
As you can see, there are several different options for retirement plans for small businesses. The one you choose is based on what your needs are and how many employees you have.