4 Retirement Plan Options for Small Businesses
When I started my online business in 2007, saving for retirement wasn't the first thing on my mind. I wasn't at all familiar with the retirement savings options available to the self-employed and small-business owners. But when my accountant told me I could save up to $50,000 in tax-deferred accounts, my ears perked up. As an employee, I resigned myself to the contribution limits imposed on IRA and 401(k) accounts. So the SEP IRA I opened in 2010 was an unforeseen advantage to starting a business.
SIMPLE IRAThe Savings Incentive Match Plan for Employees (SIMPLE) IRA is suitable for many small businesses. If you have 100 or fewer employees who earned $5,000 or more on payroll in 2012, this plan could work for you. Pros of a SIMPLE IRA
- Easy setup: To set up a SIMPLE IRA plan, you can use forms provided by the IRS. Use form 5304-SIMPLE if you'll allow your employees to choose where to invest their SIMPLE IRA contributions. Use form 5305-SIMPLE if you plan to choose the financial institution for everyone on the plan. Once you've set up the plan, notify your employees about the changes, and you're ready to get started.
- Affordable setup: It may not cost you a dime to set up a SIMPLE IRA plan. If it does, you may be able to write off the cost as a business expense on your taxes.
- Affordable maintenance: While your employees may incur some small costs for an investment adviser, you probably won't have to pay anything for this plan, because there's no administrator.
- Easy maintenance: Year-end paperwork for the SIMPLE IRA is surprisingly easy to understand and complete, so maintaining this type of plan is simple.
- Higher limits: A SIMPLE IRA offers higher contribution limits than a traditional or Roth IRA. In 2013, employees can contribute up to $12,000 to their account, plus a $2,500 catch-up contribution for employees older than 50. Employers are required to contribute either 2 percent of an employee's total compensation or a matching contribution between 1 and 3 percent of total pay.
- Matches are deductible: Money that you put into an account for your employees is tax deductible as a business expense.
- Limited to small companies: This plan is formatted for very small businesses. So if you plan to grow your business beyond 100 employees, you'll have to change plans down the road.
- Contributions count against your 401(k) contributions: If you're running a side business and contribute elsewhere to an employer's 401(k) program, this isn't the best option for you. Contributions to a SIMPLE IRA count against the $17,500 limit for your 401(k), seriously limiting your overall retirement savings options.
- Big penalties may apply: With most other retirement accounts, you'll pay a 10 percent penalty if you withdraw early. But with the SIMPLE IRA, the penalty could be as high as 25 percent of the account's balance. Plus, within the first two years, you can't roll your money into a new account without incurring this steep penalty.
- Accounts have to be open by Oct. 1: If you're looking for a way to cut your tax bill for 2012, this isn't it. You must open an account by Oct. 1 to make contributions for that tax year.
- Mandatory contributions: As an employer, you'll have to make certain contributions to your employees' accounts, even if you're not having a great business year.
- Low contribution limits: Compared with other options for employers and the self-employed, the SIMPLE IRA has very low contribution limits, which can hurt you if you're trying to save big for retirement.
SEP IRAThe Simplified Employee Pension is as easy to work with as a SIMPLE IRA, but it could cost your business a lot more if you have more than one or two employees. In my case, I donÃƒÂ¢ t have any employees, so the SEP IRA was ideal. Pros of a SEP IRA
- Easy setup: Setting up a SEP IRA is as easy as setting up a SIMPLE IRA. Fill out form 5305-SEP, let your employees know, and get started.
- Affordable setup: Again, because setting up a SEP IRA is easy, there aren't many administrative costs. And you may be able to write off the setup costs as a business expense.
- Easy maintenance: As with the SIMPLE IRA, administration for a SEP IRA account is simple.
- Non-mandatory contributions: Employers make all the contributions to a SEP account, but employees don't have to make contributions, and contributions don't have to be a set amount or percentage.
- Tax-deductible contributions: Any contributions you make to your or your employees' SEP IRAs are tax deductible as business expenses.
- Contributions don't affect other accounts: Contributions that you make to an employee's SEP IRA don't affect his or her ability to contribute to another IRA account. Employees who also work for another business where they have a separate retirement account can still have a SEP IRA with your company.
- Good motivation: Many businesses run a SEP IRA so that the more a business profits, the more the employer contributes. This can be good motivation for employees to help boost the company's bottom line.
- Can be terminated at any time: If your business grows beyond the point where a SEP IRA plan is a great idea, or if you let an employee go, the plan ÃƒÂ¢
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