Consider This When Planning Your DIY Retirement Plan.
As a small business owner setting up a retirement plan for yourself and your employees, there are some important things to consider.
There are several types of plans. We covered two of the most popular options for small businesses, a Simple IRA and a SEP IRA, in a previous post “Small Business Retirement Strategies”. Today we will cover three more options that you could consider for your DIY Retirement Plan.
Before we look at those options here are two things you need to consider when choosing which plan best fits your business.
Matching a retirement plan to your business
As you consider the specific features of each plan, it’s important to remember that there are always trade-offs. Think very carefully about your priorities.
Here are some factors that may be helpful as you consider the right retirement plan for your business:
If you have no employees other than you and your spouse (or business partner) and want the highest possible contribution limits, consider a Self-Employed 401(k). If, however, additional employees are a possibility in the future, you may need to choose between a SEP IRA and a SIMPLE IRA, both of which can cover employees. Then it’s a matter of deciding whether you want to fund your employees’ accounts by yourself (SEP) or you want your employees to contribute (SIMPLE).
Contributions: how much and who pays?
Next, think about how much flexibility you want in terms of contribution limits and who is responsible for making such contributions.
A Self-Employed 401(k) plan offers the largest possible contributions because it recognizes that self-employed people wear two hats—as an employee and as an employer. In fact, as an employee, you can make elective deferrals of up to $18,000 for 2015. As an employer, you can make a profit-sharing contribution of up to 25% of compensation, up to a maximum of $53,000 for 2015. (Total contributions as employer and employee can not exceed $53,000 for 2015.) The plan also allows catch-up contributions of up to $6,000 for those who are age 50 or older in 2015. You are also eligible for added tax breaks. If your business is not incorporated, you can generally deduct contributions for yourself from your personal income. If your business is incorporated, the corporation can generally deduct the contributions as a business expense.
If you have a business with variable income and you want more flexibility, you might consider a SEP IRA. Just remember that, if you have employees, you have to contribute the same percentage for them as you contribute for yourself. As an employer, you can contribute up to 25% of compensation, up to a maximum of $53,000 in 2015. And you don’t have to contribute every year.
On the other hand, if you want your employees to help fund their retirement account, you may want to consider a SIMPLE IRA, available to businesses with up to 100 employees. With a SIMPLE IRA, employees can make salary deferral contributions of up to 100% of compensation, not to exceed $12,500 in 2015. You, as the employer, must also contribute to their accounts—you can either match the employees’ contributions dollar for dollar up to 3% of compensation (contributions can be reduced to as little as 1% in any two out of five years), or contribute 2% of each eligible employee’s compensation. The SIMPLE IRA also allows employees age 50 or older to make catch-up contributions of up to $3,000 in 2015.
– via www.fidelity.com
Two More Options For Small Business Retirement Plans
Now let’s look at those additional types of retirement plans for you to consider. The first is a very simple option called a Payroll Deduction IRA and the second is a standard 401K plan. These excerpts are from the Department of Labor website for small business retirement plans.
Payroll Deduction IRAs
Even if an employer does not want to adopt a retirement plan, the employer can allow its employees to contribute to an IRA through payroll deductions, providing a simple and direct way for employees to save. In this type of arrangement, the employee always makes the decisions about whether, when, and how much to contribute to the IRA (up to $5,500 for 2015 and 2016, and $6,500 for 2015 and 2016 if age 50 or older, increasing thereafter).
Some individuals eligible to contribute to an IRA wait until the end of the year to set aside the money and then find that they don’t have sufficient funds to do so. Payroll deductions allow employees to plan ahead and save smaller amounts each pay period. Payroll deduction contributions are tax-deductible by the employee, to the same extent as other IRA contributions.
401(k) plans have become a widely accepted retirement savings vehicle for small businesses. An estimated 53 million U.S. workers participate in 401(k) plans that have total assets of about $4 trillion.
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. Deferrals are made on a pretax basis but, if the plan allows, the employee can choose to make them on an after-tax (Roth) basis. Many 401(k) plans provide for employer matching or other contributions. The Federal Government and most state governments do not tax employer contributions and pretax deferrals (plus earnings) until distributed.
Like most profit sharing plans, 401(k) plans can vary significantly in their complexity. However, many financial institutions and other organizations offer prototype 401(k) plans, which can greatly lessen the administrative burden of establishing and maintaining these plans.
– via www.dol.gov
A Very Simple Retirement Plan
If you need something very simple and flexible and your employees need to be able to make small contributions the MyRA may be right for you. Take a look at how the MyRA works.
Roth IRA that invests in government bonds
- Contribution limits: $5,500.
- No-hassle plan for employers.
The MyRA is as simple as it gets. The minimum deposit is $25 per employee, and you or your employees can contribute as little as $5 per pay period. There is no cost to employers. They don’t administer employee accounts, nor do they contribute to them or match employee contributions. The government provides all the materials you need to explain how it works to employees.
The accounts are Roth IRAs, which means contributions are made with after-tax dollars. The money earns a guaranteed return equal to that of the “G” fund in the government’s Thrift Savings Plan, currently 1.875%. Savers can contribute up to $5,500 per year, or $6,500 if they are age 50 or older. Money contributed can be withdrawn at any point without taxes or penalties.
Participants can accumulate no more than $15,000. After that, the money must be rolled over into a privately held Roth IRA.
– via www.bankrate.com
Have you made a decision about your small business retirement plan yet?