If you are a micro- to medium-sized business owner, consider reevaluating the role of retirement planning in your business operations as well as in your individual tax ‘portfolio.’
Choosing the right retirement solution for your small business can be instrumental in providing growth and security for yourself, your employees, and your enterprise as a whole.
The tax advantages of small business retirement plans include:
Tax deductions for employer contributions to employee plans (including yours as the ‘self-employed’ owner)
Increased savings limits - up to $53,000/year per individual ($106,000/year for married couples)
“Catch-up” rules that allow employees age 50 and over to set aside additional contributions
Money contributed to the plan grows tax-free (i.e., ‘tax-free compounded growth’)
So what’s the best plan for your small business? Let’s start with an aerial view:
There are two broad spectrum of retirement solutions: IRA-based plans and 401(k)-based plans.
IRA-based plans are typically easy to set up and maintain, and come in three shapes and sizes:
Payroll Deduction IRA – employers facilitate funding of employee IRA’s (traditional or Roth) through employee salary deferrals. Maximum contribution per employee for 2016 is $5,500, with catch-up contributions up to $1,000.
Simplified Employee Pension [SEP] IRA – employers contribute up to 25 percent of an employee’s compensation, not to exceed $53,000 for 2016.
Savings Incentive Match Plans for Employees [SIMPLE] IRA – employees and employers contribute up to a combined $28,000 per employee ($12,500 per employee, $3,000 catch-up, employer match equal to lesser of employee deferral or 3 percent of employee compensation).
401(k)-based plans, while more onerous and expensive for the employer than IRA-based plans, are nonetheless a powerful human resource tool for micro- to medium-sized businesses. One key difference between IRA-based plans and 401(k)-based plans is that all contributions in IRA-based plans are immediately 100% vested. In contrast, only employee contributions to 401(k)-based plans are immediately 100% vested by default. That is, while companies can stipulate that employer contributions to 401(k)-based plans vest immediately, it is common for companies to utilize a vesting schedule for employer contributions in order to incentivize employee retention.
401(k) plans can be structured as “Traditional,” “Safe Harbor,” “Automatic Enrollment,” and “Profit-Sharing,” among others. Common features of all 401(k) plans include the following:
Employees can contribute up to $18,000, with an additional $6,000 contribution for participants over the age of 50.
Employer/Employee combined contributions are limited to the lesser of 100 percent of compensation or $53,000 for 2016.
Employee and Employer contributions are based on a salary reduction agreement with a vesting schedule.
The ‘plan’ must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year.
I am not here to sell you a small business retirement plan. Rather, my wish is to raise your level of awareness in terms of options for growth and success.
If you are interested in learning more about small business retirement solutions, please download the following publications at www.irs.gov or order a free copy through the IRS at 800-829-3676:
Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
Publication 590, Individual Retirement Arrangements (IRAs)
Publication 3998, Choosing a Retirement Solution for Your Small Business
Publication 4222, 401(k) Plans for Small Businesses
Publication 4333, SEP Retirement Plans for Small Businesses
Publication 4334, SIMPLE IRA Plans for Small Businesses
Publication 4587, Payroll Deduction IRAs for Small Businesses
Publication 4674, Automatic Enrollment 401(k) Plans for Small Businesses
Publication 4806, Profit Sharing Plans for Small Businesses