The reality is that most entrepreneurs and small-business owners do not save a lot. Most of their wealth is wrapped up in their business because they focus on putting the earnings back into the business to ensure growth. Once the business becomes profitable, small-business owners need to consider developing a retirement plan. Not only will a retirement plan encourage regular savings for your future, a benefit plan can be used to attract and retain talented employees, further ensuring your business’ success.
A potential drawback is that there is not a universal solution. There are many different types of plans to choose from, and your choice of plan depends partly on how many employees you have, how much you want to save and how much the business is willing to contribute to your employees’ accounts.
If you are a sole proprietor with no employees, your options are greater since you do not have to worry about others when creating your plan. Typically, sole proprietors look to Simplified Employee Pensions, also known as SEP IRAs, or Individual 401(k) plans because these two plans allow the individual to contribute more than a traditional IRA. SEP IRAs allow tax-deductible employer contributions. In 2017, you can defer up to 25% of an employee’s compensation, or 20% for yourself if you are self-employed and contributing to your own SEP IRA, provided the amount does not exceed $54,000. The maximum contribution limit for Individual 401(k) plans is also $54,000, but this is a combination of employee salary deferral, up to $18,000 and the employer contribution. Furthermore Individual 401(k)s allow individuals 50 or older to make a catch-up contribution of $6,000, bringing the total contribution to $60,000.
If you have employees, an Individual 401(k) is generally no longer an option. However, you can still offer a SEP IRA. There are nondiscrimination rules requiring that plan contributions not discriminate in favor of shareholders, officers, or highly compensated employees. Typically, the nondiscrimination rules are satisfied by providing either an equal percentage of pay or a flat dollar amount for all participating employees. The drawback to a SEP IRA is that employees are fully vested once contributions are made, which—while good for the employee—does nothing to encourage employee retention.
You can offer your employees a traditional 401(k) plan, but this can get costly to administer, and there are very stringent rules as to how the business contributes on behalf of the employee. The benefit, however, is that employer contributions can be subject to a vesting schedule where employees accrue non-forfeitable rights based on how long they work for the company.
For a plan that is easier to administer, your small business may want to consider a Savings Incentive Match Plan for Employees of Small Employers, better known as a SIMPLE IRA plan. Employees can defer up to $12,500 in 2017, while the business promises to match contributions dollar for dollar up to 3% of pay or make a non-elective contribution for all eligible employees equal to 2% of pay. With SIMPLE plans, employees are 100% vested once contributions are made.
Regardless of your choice of plan, it is vital that you work with an expert in small-business retirement plans. Your tax adviser may recommend setting up a retirement plan to decrease your business’s tax liability, but C.P.A.s are often not experts when it comes to plan costs, developing a plan based on the demographics of your employees or even the investment options for your plan. It pays to have a specialist come in and really look at your business and your goals and develop a plan that will best fit your situation.
If you have questions about developing a retirement plan for your small business, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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