No matter how large or small
your business is, planning for retirement not only makes good fiscal and
tax sense it can also help attract and retain employees.
And whether you are a sole proprietor or manage only a few employees,
there are many options that can meet your particular needs – if you
know how to find them.
This article will walk you through some of the more popular options
available and introduce you to a nifty online tool from the IRS that can
help you choose and update your plan as your employee and business
Retirement Plans – A Quick 101
As a small business owner, there are several retirement plans
available to you but the ones you will hear most about are IRA, SEP,
SIMPLE, and 401(k) plans. Here’s a quick overview of how each of these
1. Individual Retirement Arrangement (IRA)
IRAs let you set aside money for retirement and are offered by banks,
mutual funds, and other financial institutions. They are a common
option for sole proprietors, although some plans do allow employees to
contribute through a payroll deduction.
- Traditional IRA –
These plans are easy to set-up and operate and award retirement
benefits based on the participant’s account balance. To contribute to a
traditional IRA you must be under 70? years old at the end of the tax
year and have taxable compensation greater than, or equal to, your
contribution during the year. Contributions may be tax deductible in
full or part, depending on your circumstances. The amounts earned by
your IRA contributions are usually not taxed until you withdraw the
money. Generally you can’t withdraw money from your IRA before you turn
age 59? without paying income taxes and a 10 percent additional tax.
- ROTH IRA – You
can set up a ROTH regardless of your age. And while you can’t deduct
your contributions, if certain requirements are met, earnings will be
2. Simplified Employee
Pension (SEP Plan)
The SEP Plan is specifically designed for small employers and has
very few administrative burdens or costs. Employer contributions are
made directly to IRAs that the employer sets up for the employees. A SEP
is funded solely by employer contributions. Each employee is always 100
percent vested in (or, has ownership of) all money in his or her
3. Savings Incentive Match Plan for
Employees (SIMPLE Plan)
If you have fewer than 100 employees and meet certain other
requirements you can set up a SIMPLE IRA or SIMPLE 401(k) plan.
Because this is a simplified plan, the administrative costs should be
lower than for other, more complex plans. Under a SIMPLE IRA plan,
employees and employers make contributions to traditional IRAs set up
for employees (including self-employed individuals), subject to certain
limits. It is ideally suited as a start-up retirement savings plan for
small employers who do not currently sponsor a retirement plan.
4. 401(k) Plan
401(k) plans are the most popular type of retirement plan used today.
They can be a powerful tool in promoting financial security in
retirement and are a valuable option for businesses considering a
retirement plan, providing benefits to employees and their employers.
Employees may defer a portion of their salary as either a pre-tax or
There are several types of 401(k) plans for which you can
make either non-elective or matching employer contributions.
Finding the Right Retirement Plan for Your Business