Successful Retirement Planning – Part 3 Small Business Owners
This is the last in a three part Series brought to you by our Guest Blogger Dianne M. Webb CFP®, EA, CDFA™ of Stonebridge Financial Planning Group. http://www. stonebridgefpgroup.com
As a small business owner you have several options in retirement plans that you can set up for your business.
There are several advantages to establishing a company retirement plan 1. Not only are you preparing for your own retirement but the other benefit is to gain and retain good employees 2. Employer contributions are tax deductible 3. Assets in the plans grow tax deferred. Meaning you won’t pay tax on the money until you pull it out in retirement.
IRA Account Before you start a plan in your business, start by making the maximum contributions to your own IRA or Roth. (See Part 2 of this blog series)
If a you are a solo practitioner with no employees Solo 401k 1. No employee’s other than spouse 2. Contribute up to 25% of business profits or a max of $51,000 ($56,500 if age 50 or over) 3. Contributions are not required. 4. Can take loans up to 50% 5. No IRS filing if the plan has under $250,000 in it.
There are 2 other very simple, low cost employer plans that you can choose from. Neither of these requires any Employer reporting or audit:
SEP This plan only allows EmployER contributions. You need to work with a Financial Advisor to help you open the accounts. 1. YOU decide how much to contribute. 2. You must contribute the same percentage of wages to each employee including yourself 3. The contributions are voluntary. If you have a bad year, you don’t have to do anything 4. It must be offered to all employees over 21, employed for 3 of 5 years and who make at least $550 5. The max contribution is 25% of wages (up to $51,000) 6. It can create and contribute until due date of employer tax return
Simple IRA This plan also does not require IRS reporting. 1. Must have fewer than 100 employees 2. Both Employer and Employee contributions 3. Employee – payroll deductions up to $12,000/yr. ($14,500 if 50 or older) for 2013 4. Employer – Either match up to 3% or give 2% to all employees 5. Must create plan by 10/1 of year 6. Must be offered to all employees who have earned at least $5,000 in any prior 2 years and are expected to continue to do so.
401k This requires IRS tax filing each year and administrative fees. These are not usually cost efficient for small businesses. You must hire a Plan Administrator in addition to a Financial Advisor. Safe Harbor Plan 1. File 5500 but no non- discrimination testing 2. Employer must match employee contributions or 3% for all – max $51,000 Traditional or Roth 401k 1. File 5500 and testing 2. Up to 100% of compensation or $51,000 (can only deduct up to 25%) With both of these the Employee can contribute, pre-tax $17,500 (+$5,500 for 50 and over) There is one critical thing to remember as a small business owner before you start any of these plans. ALL of the employer retirement plans are based on what you earn…. Earn, as in W-2 wages. I find that a lot of small businesses are not paying the owner a salary. Please consult with your CPA to correct this first.
You can pick the plan that fits you and your employees the best to prepare for your own retirement as well as your employee.