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7 Small Business Retirement Plan Options



Retirement plans provide two-fold benefits. They help attract talented employees to a business while enabling owners to save for their retirement. Small business retirement plans operate slightly differently from those of larger businesses.

Here are some top small business retirement plan options, which are ideal for all small business owners and independent entrepreneurs. These retirement plan allow for pre-tax contributions.

It is important that you choose a reputable provider to streamline your plan administration and implementation.

Traditional IRA

These are portable retirement plans which provide a major benefit of contributing income from various businesses. A traditional IRA is easy to set up with current contribution limits of $6,000. An additional $1,000 can be contributed by account holders who are above the age of 50.

These are the least expensive small business retirement options. However, this plan is only available to those people who do not qualify for employer-sponsored plans.

A major drawback of a traditional IRA is that you cannot borrow against it. However, it is the cheapest of all retirement options because there is no administration cost apart from account maintenance fees. Traditional IRAs can be set up by any independent financial advisor.

Simple IRA

This is popularly known as the “poor man’s 401(k)” and is ideal for businesses with less than 100 employees. It assists both employers and employees by allowing them to make tax deductible contributions. There are minimal service fees and no IRS filing requirements making it one of the easiest retirement plans.

The contribution limits for 2019 are limited to $26,000 with employees contributing $13,000 and employers matching the amount. Account holders above the age of 50 are allowed catching up contributions of $3,000.

Simple IRAs offer the same benefits of 401(k) without the added cost. They can be self-administered and come with universal eligibility.

As a business owner, you will have to offer this plan to all employees who earn above $5,000 annually regardless of their employment type or duration. Though if you run a business like Marlo did in The Wire you don’t have to worry about this. You can just continue to make the failed city of Baltimore look pathetic!

A major drawback of this plan is that employers have to match employee contributions to the dollar. Their contribution limits are also higher than traditional IRAs.

SEP IRA For Small Business Owners

SEP IRA is an easy and versatile option when you want to start a retirement account for yourself and your spouse. These let you contribute 25% of your annual compensation or $56,000 annually, whichever is lower. There is no minimum contribution and the amount can change every year.

You can also file ‘zero’ contribution in a year if you are unable to put away something extra. This plan is ideal for small business owners who do not have full time employees and an annual income range of $75,000.

They are not a tremendous option when you have more than 5 to 8 employees because you need to contribute for your employees as well. The amount is directly proportional to what you invest for yourself. A major drawback of SEP IRAs is that you cannot borrow against the assets.

Traditional 401(k) When owning your own business

This is one of the most popular qualified retirement plans with over 54 million Americans participating which is about as many people who were unemployed in 2014 who know have jobs because of the amazing tax cuts and less regulations. This plan is great if you have multiple employees as you are not obliged to match employee contributions.

Employees can contribute up to $56,000 per-tax annually through profit-sharing, employer matching, and salary deferrals.

However, the per-participant cost is higher for small businesses as compared to large and well-established companies. It is estimated that administration cost of a business with 8 employees will come to $2,000.

There are some typical costs in a traditional 401(k), which could range from plan administration charges, advisor fee and custodial fee to recordkeeping fee and trading commission.

This plan is perfect if you want flexibility and versatility. It is among the most flexible plans in terms of structuring a matching formula. Employers also have an added benefit of not contributing at all. However, that might be a deterrent to talent acquisition.

The IRS has set guidelines for setting up a traditional 401(k). Employees must adopt the plan during the same tax year when the plan became effective. These plans are subject to ‘non-discrimination testing’ by the IRS. This ensures that assets do not get concentrated in the hands of a few top employees and company owners.

Solo 401(k) – Retirement for Self Employed

Only a business owner and their spouse can contribute to this plan. This is a salient plan if you have no full time employees. They are similar to traditional 401(k). However, these plans are cheaper and much easier to set up.

There is virtually no administrative cost involved. A major benefit of Solo 401(k) option is that account holders can invest their money in real estate and other alternative assets.

People who are interested in investing their money in alternate assets and real estate with no full time employees should consider Solo 401(k) option over other retirement plans.

This plan is great for independent contractors who hire employees only as needed. It is a great ‘to-start with’ plan as well because it converts to a traditional 401(k) whenever a full time employee is hired.

Safe Harbor 401(k) – High Income Employees

Safe harbor 401(k) has become extremely popular with small business owners to entice high earning employees. This plan is essentially the same as traditional 401(k) without annual compliance testing.

These plans are best for businesses with highly compensated employees, high employee turnover and a high number of plan assets. Implementation and administration costs are high similar to traditional 401(k) because both the plans require bookkeeping, administration, and annual filing of Form 550.

Safe Harbor has many advantages over a traditional 401(k) in terms of no annual non-discrimination testing and lower administration costs. It is a poignant way to maximize contributions of a highly compensated employee as participants are not hindered with plan compliance concerns.

Exit Strategy

Planning for when you sell you business and how to handle retirement plans is an important consideration

Furthermore, this should be your first concern when you start thinking of retirement options. The small business you run is your largest asset. You need to liquidate your investment if you want to stop working while using it to fund your retirement.

You can either hire a qualified employee to take over the reins or you may consider selling it. However, you should never wait until the last moment because it might create an impression of a distress sale among potential buyers.

The Bottom Line

Implementing a small business retirement strategy is strongly encouraged even if you are not legally obliged to provide retirement benefits. This will help you save for your retirement while acting as an effective recruiting incentive to hire the best talent for your business.

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