Most people are familiar with traditional IRAs, Roth IRAs and 401ks as methods of saving money for retirement. However small business owners looking to provide retirement savings benefits for themselves or their employees have more options to meet those needs. Offering a retirement plan can help small businesses remain competitive when it comes to attracting and keeping quality employees, not to mention the potential tax benefits the business can reap by contributing to the plan. That being said, the smaller a business is, the less time and money it usually has the luxury of spending on a retirement plan. From the administrative costs of a 401k, which are often much more expensive for plans with fewer participants, to fluctuating and unpredictable revenues that may make retirement contributions difficult to guarantee, retirement plans for small business owners can be a nightmare. To hopefully ease the pain, we have broken down two options that may be beneficial to small businesses and their employees.
The SIMPLE IRA
SIMPLE IRA stands for Savings Incentive Match Plan for Employees Individual Retirement Account. This type of account is similar to a traditional IRA, but has higher contribution limits (in 2019 the employee contribution limit is $13,000 with a catch-up contribution of an additional $3,000 for employees over the age of 50). Small business owners can establish an individual SIMPLE IRA account for themselves and their employees who can choose to make elective deferrals. Employees defer a certain amount from their paycheck through regular payroll deductions. They receive tax deductions for their deferrals and the investments will grow tax deferred until withdrawn. Employers make contributions to the employees’ accounts either through matching contributions dollar for dollar up to 3% of employees’ pay or as non-elective contributions of 2% of employee pay regardless of employee participation. The employees receive 100% immediate vesting, meaning if they accept a new job or retire, they can take all of the funds in their individual SIMPLE IRA account with them.
The SEP IRA
The SEP IRA, or Simplified Employee Pension, is another way small business owners can make retirement contributions for their employees. Unlike other workplace retirement plans, employees do not make contributions to their own SEP IRA. The employer can contribute up to 25% of an employee’s salary, or up to $56,000 (in 2019), whichever is less, and the employer receives a tax deduction for the tax year to which the contributions are designated. Employers choose when to make contributions, as long as they are before the tax filing deadline, and the contributions are not mandatory each year. In any year, the contribution amount can be as little as 0% or the maximum 25%. All employees who are at least 21 years old, have earned more than $600 in the year, and have worked at the company for at least three of the last five years, including the business owner, must receive a contribution of the same percentage of salary. SEP IRAs do not offer a catch-up contribution provision unlike other IRAs and 401ks.
Finding a Retirement Plan to Fit Your Business
In determining the right plan for you and your small business, it’s important to remember that there are always trade-offs. Keep in mind your priorities and which factors are most beneficial for you, your business and your employees. Check out some of the retirement plan guides in our Jacobi Media Center to help compare some of the different plans available. If you would like to discuss these options or are interested in starting a retirement plan for you and your employees, please give us a call today!
This information was developed as a general guide to educate plan sponsors and plan participants, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.