Are you a sole proprietor? Or do you run your business with up to 100 employees? These questions are important because their answers will help you decide which small business retirement plan fits you the best.
Most small business owners choose one of the types of 401(k) plans because they are familiar with them. However, after they review their situation, they often realize that another retirement plan type, such as Self-Employed 401(k) or SEP IRA is more appropriate.
So, it’s important to understand the options you have for your retirement planning, it can help you boost your retirement savings and reap maximum benefits.
In this article, we’ll focus on 3 types of retirement plans, because these are the 3, which are more suitable for small businesses with employees of 100 or less.
1. SEP IRA – If you have less than 3-5 employees and is willing to fund all the employee contributions, this is the best plan for you. Your contribution as an employer can be tax-deductible as a business expense.
2. SIMPLE IRA – If you want a structure of a 401(k) with lower contribution limits and also at a lower cost, this plan is the best for you. It is best for businesses with 100 or fewer employees. Employer contributions are tax-deductible, and employee contributions are pre-taxed.
3. Self-employed 401(k) – Best for you if you want to invest in assets such as real estate or plan to hire employees later. It is a tax-deferred retirement plan for self-employed individuals. It is suitable only for businesses with employees, who do not have an ownership interest.
Which of the three is the one for you? To select the right plan, you need to know the nuances of each of the plans and match them with your priorities.
Understanding the differences in the plan types is an important step. Why? Because a wrong retirement plan can rob you of important tax benefits or compel you to make a mistake regarding employee contributions.
How to choose the right retirement plan
The right plan is the one that meets your needs. What is your need? Is it ease of administration? Or do you want employees to be able to contribute to the plan? Knowing where your priorities lie is a key component in choosing the right plan.
Here are some factors that may be helpful to consider the right retirement plan for your small business:
1. Covering employees
- If your small business has no employees other than you and your spouse/partner and you want to make high contribution limits, consider a Self-Employed 401(k).
- If you plan to hire employees in the near future, you can choose between a SEP IRA and a SIMPLE IRA. Both of these plans cover employees. If you want to fund your employees’ account by yourself, then consider SEP IRA. If you want your employees to contribute, then consider a SIMPLE IRA.
2. Contributions
Next, you need to think about how much and who is responsible for making the contributions.
Self-Employed 401(k)
You can wear two hats here – an employer and an employee.
- As an employee, you can make elective deferrals of up to $19,000 for 2019.
- As an employer, you can make a profit-sharing contribution of up to 25% of compensation, up to a maximum of $56,000 for 2019.
- If you are 50 and above, you can contribute $6,000 more like a catch-up contribution.
- You can take added tax breaks.
- If your business is not incorporated, your contributions for yourself can be deducted from personal income. If your business is incorporated, the corporation can deduct the contributions as a business expense.
SEP IRA
If your business has a variable income and you want more flexibility, SEP IRA might be the right one for you.
- If you have employees, you need to make sure that you contribute the same percentage for them as you contribute for yourself.
- As an employer, you don’t have to contribute every year. Your contribution can be up to 25% of compensation, to a maximum of $56,000 in 2019.
Simple IRA
If you have up to 100 employees and you want them to help fund their retirement account, consider a SIMPLE IRA.
- Your employees are allowed to make salary deferral contributions of up to 100% of the compensation that should not be more than $13,000 in 2019.
- As an employer, you must contribute to their accounts—either by matching the employees’ contributions dollar for dollar up to 3% of compensation or contribute 2% of each eligible employee’s compensation.
- Your employees aged 50 or older can make catch-up contributions of up to $3,000 in 2019.
3. Time and money
All these 3 plans are low cost and easy to implement. You don’t need to file an annual plan with the IRS with SEP IRA and SIMPLE IRA. You may need to put in a little effort with Self-Employed 401(k) plan as you may need to file an annual Form 5500 once your plan assets go above $250,000.