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Small Business Retirement Plan Options

This week we are talking about retirement plans that are available to small businesses.  There are essentially 4 types of plans.  The first type are IRA-based plans, the second is an individual 401K, the third type are defined contribution plans, and the rest can be categorized as defined benefit plans.  

Today I will focus on the IRA based plans and the individual 401k (or solo-K) plans.  The IRA plans include the payroll deduction IRA, the SEP IRA, and the Simple IRA.  There are pros and cons of each of these types of plans, but in general, one of the major benefits of these types of plans are that they are low cost and easy to administer. 

The payroll deduction IRA and the SEP IRA are open to any business with 1 or more employee.  The Simple IRA can only be used by business with less than 100 employees.  The Solo-K is available to very small businesses, mainly those that are self-employed or a husband-wife team.

The plans also differ on who makes contributions.  With the Payroll deduction, employees make contributions however they wish.  The limits on these plans are the same as any other IRA, which means $5500 for those of us under 50, and $6500 for those of us over 50. 

For the SEP, only the employer makes the contributions, which are capped at either 25% of compensation, or $53,000 in 2015.  For the employees, the employer decides to make contributions from year to year. 

With the SIMPLE, both the employer and the employee can make contributions.  The limits are lower with the simple than with the SEP, and employees are capped at $12,500 per year ($15,500 if over 50).  The employer must either match 100% on the first 3% of compensation, or contribute 2% of each employees compensation. In any 2 out of 5 years, the employer can lower the contribution down to match only 1% of the employee compensation.

For the solo-K plan, the employer makes the contributions for him/herself.  Deferall limits are capped at $18,000 if under age 50, but the profit sharing contribution can be up to 20% of your total earnings, up to the maximum of $53,000.  For those that are over 50, the maximum deferral is $24,000, and the maximum profit sharing can match up to 25% up to the maximum of $59,000.  This is a great plan for couples (especially over 50) who run a profitable small business, as they can sock away $118,000 of pre-tax money per year with very little expense. 

With all of these plans, all contributions are immediately 100% vested.  All withdrawals from the plans are subject to income taxes and penalties when applicable.  There are no loans allowed on the IRA plans, but loans may be permitted on the solo-k plan. 

Please feel free to contact us if you need any more information about these types of small business retirement plans.  Choosing the right plan for your small business is important, and then managing your contributions in the right way can make a huge difference in the quality of your retirment!