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Business Tax Strategies
Which retirement plan should my small business offer?There are a number of retirement solutions that can help you secure your future and that of your employees, but the decision-making process can be challenging.
Solo 401(k): Best Retirement Plan for Maximizing ContributionsIf you’re self-employed or a business owner with no employee other than your spouse, you’re eligible to establish a self-employed 401(k). This is the retirement plan of choice for business owners who want to maximize their contributions to their retirement plans. The plan is suitable for sole proprietors, partnerships, C corporation and S corporation business owners. This plan offers the greatest possible contribution among retirement plans as it recognizes that you are both employer and employee. As an employee, you can contribute up to the annual contribution limit of $18,500 in 2018. Plus, you can make the employer contribution of up to 25% of compensation for a total maximum contribution of $55,000.
SEP IRA: Best Retirement Plan for a Sole Proprietor Who Wants Easy Administration The Simplified Employee Pension (SEP) IRA is an excellent choice for the sole proprietor who wants to save for retirement with a minimum of administrative headache. Unlike the Solo 401(k), a SEP IRA can cover employees. The plan is easy to setup and maintain, and there are no setup fees or annual charges. These plans are completely employer funded, and employees make no contributions. For 2018, the employer can contribute up to 25% of compensation to a maximum of $55,000. Note though, that a SEP can become expensive if you want to save aggressively. While you as an employer are not required to make a contribution every year, you must contribute the same percentage for employees that you contribute for yourself.
SIMPLE IRA: Best Plan for Employee Participation in Funding the Retirement AccountThe Savings Incentive Match Plan (SIMPLE) IRA allows businesses with fewer than 100 employees to establish an IRA for each employee. Employees are allowed to make salary deferral contributions of up to 100% of compensation, or no more than $12,500 in 2017. The employer also contributes to the account, either matching employee contributions dollar-for-dollar up to 3% of compensation, or contributing 2% of each employee’s compensation. Advantages to this option include easy setup and few administrative burdens.
SIMPLE 401(k): The SIMPLE 401(k) is an alternative for companies that wish to avoid the administrative bur-den of a standard 401(k). Employees can elect to contribute, but unlike a regular 401(k), you as the employer are obligated to make a matching contribution up to 3% of each employee’s salary, or a non-elective contribution of 2% of each employee’s salary. One feature that could make the simple 401(k) less attractive to companies is that contributions made into the account vest immediately, thus negating a staged vesting plan’s employee retention benefit.
Questionsto Answer
• Do you have employees or expect to in the future?
• Is it important that employees are able to contribute to a retirement plan?
• Is your priority higher contributions or ease of administration?
• Would you like plan contributions to be deductible as a business expense?
