Which of the Small Business Retirement Strategies Will You Choose?
Every small business owner is well aware that the buck stops with them. There is no head office making decisions for the business owner. Similarly, there is no larger corporation that will set up and fund the business owner’s retirement.
Day to day operations are often so demanding of the small business owner’s time and money that reviewing all the possible small business retirement strategies seems impossible. The tax savings are attractive but often the perceived complication keeps the small business owner from choosing a plan and implementing it.
But time marches on and having a plan for the day when you decide to retire is smart. Another consideration is the possibility of setting up a simple plan that allows your employees to easily save for their retirement while working for you.
Here is a look at some of the most popular small business retirement strategies and a few advantages of setting one up.
Small business owners are often too busy making sales, servicing clients, or otherwise running their operation on a day-to-day basis to spend a lot of time thinking about the future. But the smart ones will plan for their future retirement. Owners can both address future concerns and help themselves immediately since retirement savings offer tax reduction advantages. There are a broad away of retirement plan options. Which is best for what types of businesses?
From the point of view of the business owner, “easy-to-use” is often the most attractive option. Lisa Chu, owner of Black n Bianco Kids Wear in Los Angeles, California, says, “As a small business owner the retirement plan I am using is a SEP IRA. It’s a very simple and solid retirement plan and one of the most popular among small business owners. It’s not as intricate as a 401k but still offers a tax-deducible contribution and is a low cost saving retirement plan.”
Another important factor is how owners view the business itself as an asset within their retirement portfolio. “Every business, no matter how big or small, will go through at least 3 of the 4 stages: 1) Protecting its value, 2) Growing its value, 3) Unlock its value (taking money out of the business), and 4) Preserving its value,” says Tam Pham of New York Life Insurance Company in Pittsburgh, Pennsylvania. “A retirement plans depends significantly on how business owners see their business playing a role in their retirement. For example, if the business owners plan on selling the business and/or passing it along to their heirs, owners may want to consider setting up a retirement benefit plans that includes their employees (or at least the key employees).”
When looking at the types of plans recommended by professionals and used by many small business owners, the choices themselves can be reduced to less than a handful. Levar Haffoney, Wealth Manager at Fayohne Advisors in New York City, says, “The 3 most popular retirement plans for small businesses are 401k plans, SEP IRAs, and SIMPLE IRAs.”
-via Fiduciary News
Choosing Between A Simple IRA and A SEP IRA
A simple IRA and a SEP IRA are just two options for small business. Take a look at this explanation of how each of these easy to implement small business retirement strategies works.
Establish a SIMPLE IRA.
The savings incentive match plan for employees, or SIMPLE IRA, is one retirement plan available to small businesses. In 2015, employees can defer up to $12,500 of their salary, pretax, and those who are 50 or older can defer up to $15,500 by taking advantage of a $3,000 catch-up contribution. However, employees who participate in other employer-sponsored plans can contribute no more than $18,000 in 2015 to all employer-sponsored plans combined. Employees choose how to invest the money among the investments allowed by the financial institution that administers the plan, and they pay tax on the distributions when they withdraw them.
Employers can match employee contributions to a SIMPLE IRA up to 3% of the employee’s compensation. Or, employers can contribute 2% of each eligible employee’s compensation of up to $265,000 in 2015, meaning that the maximum employer contribution would be $5,300 per worker. Employer contributions are tax deductible.
Set up a SEP IRA.
A simplified employee pension (SEP) is another type of individual retirement account (IRA) to which small business owners and their employees can contribute. In 2015, it lets employees make pretax contributions of up to 25% of income or $53,000, whichever is less. Like a SIMPLE plan, an SEP plan lets small business owners make tax-deductible contributions on behalf of eligible employees, and employees won’t pay taxes on the amounts an employer contributes on their behalf until they take distributions from the plan when they retire.
Almost any small business can establish an SEP. It doesn’t matter how few employees you have or whether your business is structured as a sole proprietorship, partnership, corporation or nonprofit. Each year, you can decide how much to contribute on your employees’ behalf – if anything – so you aren’t locked in to making a contribution if your business has a bad year. Owners of the business are also considered employees and can make employee contributions to their own accounts.
Overall, the SEP plan is a better option for many small businesses because it allows for larger contributions and greater flexibility. For more insight, read Business Owners: How To Set Up An SEP IRA.
Have you chosen a retirement strategy for your small business?