We know that self-employed Americans already have a lot on their plate however we wanted to take the time to discuss retirement plan options that could provide increased benefits over traditional retirement accounts. Certainly, majority a of people are familiar with the traditional 401(k) plan, but when considering small-business retirement plans, there are typically three additional plans small business owners should consider before making a decision:
- Self-Employed 401(k) Plan
- Simplified Employee Pension Plan (SEP IRA)
- Savings Income Match Plan for Employees (SIMPLE IRA)
While all of these retirement plans are catered for small-business, it is very important to understand the different characteristics (contribution limits, administration costs/responsibilities, tax benefits) in order to find the plan that fits your business needs. Much of the decision can be made after considering a few questions: How many employees do you employ? How much do you want to allow for contributions and from whom (you or your employees)? Do you want payment flexibility?
The Self-Employed 401(k) plan, also known as the individual or one-participant 401(k) plan, is the same as a traditional 401(k) but is designed for companies with no employees other than a spouse. This plan allows for annual salary deferrals of up to $18,000 (and an additional $6,000 if above the age of 50) for 2017. As your own employer, you may make additional contributions up to 25% of your income with a cap of $54,000 on total contributions. For example, if you contribute $18,000 as an employee, you may contribute up to as much as additional $36,000 as the employer. The Self-Employed 401(k) can be a great tool for self-employed small business owners operating a business as it allows for significant contributions
The Simplified Employee Pension IRA (SEP) has many similar rules to a traditional individual IRA but allows for larger contributions than a traditional individual IRA much like the Self-Employed 401(k).Where these two small business plans differ is that the SEP IRA is available to all small business owners with any number of employees, including those outside of their immediate family. Contributions are made on a pre-tax basis by the employer only and they may contribute the lesser of 25% of employee compensation or $54,000 for 2017. One more benefit to this plan is that you are not required to contribute every year, which might be a very important factor if your company has a significant amount of variable income from year to year.
Other important rules to remember with SEP IRAs are that all contributions rates must be the same for all eligible employees and employees are always 100% vested in the accounts so any contributions immediately belong to them.
The Savings Incentive Match Plan for Employees (SIMPLE IRA) offers a very different structure for the self-employed and can be implemented in a company with up to 100 employees. This plan caps annual employee contributions at $12,500, but does not require a minimum, which provides employees with a bit more flexibility between years. On top of the employee contribution, the employer can choose one of two different contribution options: a.) up to a 3% match of an employee’s annual compensation (can be cut to 1% for two out of five years) not exceeding $12,500 or b.) a fixed contribution of 2% of each employee’s compensation. SIMPLE IRAs also are maintained on a calendar-year basis, not a company’s fiscal year, and have strict deadlines regarding when they can be established and funded.
We know that as a small business owner, you have a significant amount of time tied up in your business, but understanding your options can lead to significant financial benefits to you and your employees. Having the right retirement plan can be a very important incentive to offer employees and could help attract the best talent to your company.
We have included a chart that may help compare the specific characteristics of each plan side-by-side. As always, if you feel your retirement plan is not meeting your needs as a small-business owner, give us a call at 610-825-3540 and we can discuss your options.