Your business can choose a retirement plan that fits
Mention the words “employee benefits” to a small business owner and you might hear the groans of someone burned by sky-rocketing costs and mind-numbing complexity. But one type of benefit — a retirement plan — need not be a stress-inducing perk. In fact, it might just be the powerful tool you’ve been looking for to save taxes and retain employees.
While choosing a retirement plan can be complicated, the underlying concepts are not. The best plan for you will depend on your personal retirement needs, the size of your business, and how you wish to motivate your employees. Here are a few of the most popular plans available.
* 401(k) plan. The 401(k) is the workhorse of the retirement world, offering attractive flexibility to both owners and employees. Up to 25% of compensation or $45,000 ($50,000 if over 50) can be paid into an employee’s account. The owner has the option to match employee contributions and specify when the benefits are vested. The downside to all this flexibility is high cost. Those with fewer than 20 employees may find other plans more economical. An exception to this is the one-person 401(k) for the self-employed, which has simpler filing requirements and lower costs.
* Simplified employee pension plan (SEP IRA). The SEP IRA was designed to give small businesses a low cost alternative to the 401(k). Unlike the 401(k), however, employees cannot contribute a portion of their own pay. What’s more, vesting is immediate, and the same percentage of salary that is contributed to the owner’s account must be paid to each eligible employee’s account. On the plus side, the maximum contribution limit is the same as a 401(k), and contributions can vary from year to year. So, if you have a lean year, you can reduce your contributions accordingly.
* SIMPLE IRA. Another option is the SIMPLE IRA. Designed for businesses with 100 or fewer eligible employees, the SIMPLE IRA permits worker contributions of up to $10,500 ($13,000 if over 50), plus a mandatory employer match of up to 3%. The SIMPLE IRA is often viewed as a good entry-level retirement plan. One drawback is the lower contribution limits compared to a SEP IRA or 401(k), which may hinder the business owner’s own retirement needs.
So which retirement plan is best for you? The answer will require careful analysis. But whether your time frame is near or far, or your business large or small, the good news is that more retirement options are available today than ever before. Give us a call to find the plan best suited for you and your business.
Before you invest in any business, it's always a good idea to discuss the proposed venture with your advisors. If you would like assistance with evaluating a business opportunity or with legitimate tax planning, please call our office.