Which are the Best Retirement Plans as a Small Business Owner?

Starting and operating a small business is a major commitment, and often the hours and weeks get long. It is all worth it in growing the business, but do not focus solely on today’s financial tasks. Take some time to investigate tax-advantaged retirement plans, whether you need to start them or to make sure your existing plan(s) will work best for your future.

The U.S. Department of Labor offers some great tips on choosing the right program, as well as detailed information about each available plani. The advantages are attractive and securing your future is every bit as important, if not more so, as growing your business.

Incentives and Advantages of Qualified Small Business Tax Plans

Depending on the type of plan, current contributions by both the employer and the employees are deductible now and grow tax deferred until withdrawal in retirement. Other plans involve after-tax contributions now, grow tax free, and are not taxed on withdrawal in retirement. There are also opportunities as your situation changes to roll over one plan into another that will be better for you in the future. Other incentives include:

  • Some plans have high contribution limits that allow participants to set aside large amounts of money for the future.
  • For those over 50 years of age, there are “catch-up” rules that allow setting aside additional contributions to speed building retirement account balances.
  • There are some tax credits allowed for the employer to offset the costs of setting up some of the plans.
  • Called a “Savers Credit,” there is a tax credit for certain low- and moderate-income individuals, including the self-employed. This is to encourage and help these income groups to save for retirement.

Available Small Business Retirement Plans

There is a chart at the Department of Labor site that makes a quick comparison of these plans easy to do to get you startedii.

  • Payroll Deduction IRAs – When an employer does not want to set up a formal retirement plan, they can still allow their employees to contribute to an IRA, Individual Retirement Account, through payroll deductions. Within prescribed limits, the employee makes their own decisions about whether to contribute, when, and how much.
  • Simplified Employee Pensions (SEPs) – This is a simplified plan the employer can set up for themselves and each of their employees. Generally, the employer is required to contribute a uniform percentage of each employee’s pay, but not necessarily every year.
  • SIMPLE IRA Plans – Employers with 100 or fewer employees can set up a SIMPLE IRA for their employees. In this plan, each employee has their contributions deducted from their pay. The employer must either match their contributions dollar-for-dollar or contribute a defined percentage that meets minimums.
  • Profit Sharing Plans – In this plan the employer decides whether to contribute, when, and how much. There must be a set formula for determining how the contributions are allocated among the plan participants.
  • 401(k) Plans – The latest estimates are that more than 55 million U.S. workers contribute to 401(k) plans that contain around $5 trillion in assets. With a 401(k) plan, employees can choose to defer a portion of their salary. So instead of receiving that amount in their paycheck today, the employees can contribute the amount into a 401(k)-plan sponsored by their employer. These deferrals are accounted separately for each employee.
    • Safe Harbor 401(k) Plans – This plan is good for businesses with highly-paid employees whose contributions would be limited under the traditional 401(k).
    • Automatic Enrollment 401(k) – This plan is good for employers who have highly-paid employees and they want to also encourage a high level of participation from all employees.
  • Defined Benefit Plans – These provide a pre-established benefit for employees. Any employer with one or more employees can set up one of these.

Check the chart referenced above to get a quick idea of plans you think would be right for your small business, then consult with someone who can advise you.

i Choosing a Retirement Solution for Your Small Business, U.S. Dept. of Labor

ii Chart at Page 4 of PDF file, Department of Labor

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