Types of Small Business Retirement Plans

It seems as though a new era is emerging; small businesses are growing more and more popular and soon they are going to be the staple of modern culture. As more and more people move away from large companies it becomes increasingly more important to educate yourself on the steps you should be taking in order to ensure a comfortable future for yourself and, if you’re a business owner, a comfortable future for your employees. Below are a few retirement options to compare that are best suited to small businesses.

One option for a small business, more specifically in-home businesses that consist solely of the owner and possibly a spouse, would be the Solo 401K Plan. Similar to other retirement plans both the employer and the employee contribute however, because you are self-employed you hold both titles. Salary deferrals up to a certain amount are available as well as up to 25% of compensation of the annual maximum.

Another good option for small business is the Simplified Employee Pension Plan (SEP). While SEP’s can be used by any businesses, it is recommended for small businesses. This plan is different than some of the other traditional ones in the fact that it is fully funded by the employer and they contribute up to 25% of an employee’s eligible compensation a year. Each eligible employee must have an individual SEP account and will receive the same percentage of compensation as all other eligible employees.

Many small business that have 100 employees or less will often have a Savings Incentive Match Plan for Employees (Simple IRA). In order to be eligible for this plan the employer must have earned at least $5000 in the previous year, and any employees must have earned at least $5000 from the employer for the two prior years and have an expected $5000 income in the upcoming year. This plan is funded by employer and employee. Employers have a mandatory matching contribution and employees can potentially have 100% compensation if the amount is less than the set total.

One of the most well-known retirement plans is the 401K Plan. This plan allows for the employee to make personal contributions up to a certain amount per year however, one of the main advantage of this plan is that there are many investment options open such as mutual funds. Employers are also required to make a certain percentage of matching contributions. This plan is more popular with some of the bigger companies and corporations.

If you are considering getting involved with a small business or opening up your own, it is important to stay informed and know all your options. These are some of the more established retirement plans in place currently, but if none of these seem like the right fit for you, don’t be discouraged, there are still other viable options. There may be some other slight variations of the plans covered above that are more catered towards what you want. Prepare for your future and decide what you’re looking for now so that when the time comes for you to retire, you’ll be able to transition with ease.

What Is a SEP IRA?

A SEP IRA is a retirement fund made for people who are self-employed and people who own businesses. SEP stands for Simplified Employee Pension and IRA stands for individual retirement accounts. It is a really basic account for retirement, just like traditional IRA. Contributions made to these accounts are tax deductible, and until retirement, investments are tax-deferred until a person has reached retirement. At that point, distributions are taxed as income.

Who is it best for?

When considering if it’s good for you, it is important to consider if you currently have employees who the IRS would consider eligible to be participants, you must make contributions on their behalf, and the contribution should be an equal compensation to yours. Participants who are eligible are 21 years or older, have worked for you for three years out of five, and in the past year, have earned $600 from you within the past year. Because there is a rule that requires equal compensation of contributions, SEP IRAs are usually best for people who are self-employed, or people who own small businesses but have few employees.

Are there contribution limits, and if so, what are they?

The limits are what make SEP IRAs stand apart from traditional IRAs. When talking about a regular IRA, you are allowed to put away a certain amount of money in a year, but when talking about them, you can hold up to around ten times more than what you could have originally stockpiled with a regular IRA. But there can be some limits. Contributions that you put towards them are not allowed to be less than 25% compensation and $54,000 in the year of 2017. 25% of the compensation is the same limit for how much you can contribute for each employee that is eligible. You are able to combine two types of IRAs. Employers contributions don’t reduce the contribution you can make to an IRA, but your traditional IRA contribution can be reduced when you’ve reached higher income levels when you combine both plans, if you are an employee that gets covered by them.

How Can I Open an Account?

The process for opening an account is very similar to the process of opening a traditional IRA. A good number of people who provide IRA accounts also offer SEP IRAs, and the account can be opened online.

The steps are as follows:

    1. Make a written agreement. This can be done with an IRS form, or it can be done through the company that provides the account.
    1. Make sure eligible employees are informed about the SEP IRA. Information can be obtained through the account provider, or they can be given a copy of IRS Form 5305-SEP.
  1. Each eligible employee must have a separate SEP IRA account, so it’s important to set that up with the employee provider.

How Do I Invest my SEP IRA?

Understanding that a SEP IRA is not an actual investment is super important. You can choose from offered investments once the account has been opened. Options usually include mutual funds, stocks, and bonds. The less time there is towards retirement, the more important bond funds will become. You can also look into index funds for bonds.