Retirement Plan Options for Small Businesses
In this guest post, personal planning expert and Hiveage user Mark Zoril discusses how small businesses can provide a better retirement plan for their staff.
Are you making money? Can you pay the bills yet? If so, congratulations! Now it’s time to start saving for your future. If so, what are your best options?
We’ll get to that but let’s take a quick step back for a moment. Let’s review the following before we discuss your retirement plan options:
First, develop an emergency savings fund. That might be $3,000, or $5,000, $10,000, or whatever size cushion you need if you end up in a bind.
Second, if you have a Family or others that rely on your current or future income, be sure to have term life insurance to protect them if you pass away. You can get a quote here.
Third, if you have high consumer debt, do your best to reduce it. Interest is a killer and eats into your quality of life, not to mention how much of a drag it is to pay these fees month after month!
If you have addressed these issues and still have some extra funds, you now can look forward! Freelancers and small business owners have some great options to save money for retirement. I have listed them in order of simple to most complex. These brief descriptions should give you a sense of what might work best for your situation and your business.
Anybody (that does not have access to an employer based retirement plan) can set-up an IRA and contribute up to $5,500 if you are under 50 and $6,500 if you are over 50. You need to have earned income to contribute to an IRA. The benefits of an IRA are that your contributions are pre-tax and the interest grows tax deferred until you withdraw the money in retirement.
You can contribute to an IRA up until you file your taxes. So, if you want to make a contribution for 2015, you have up until 4/15/2016 to contribute. Also, you can invest in a wide variety of investments from conservative to aggressive options. If you take the money out prior to 59 ½, you will pay taxes and a 10% penalty (the penalty is waived for a few different types of withdrawals. Very Simple.
All the same rules apply to the Roth IRA, with one big exception. Your contributions are not pre-tax. They are after-tax, so you do not get to deduct your contributions. However, Roth’s are great because the interest grows tax free if you take the money out after 59 ½ (or five years, whichever is later). When you take the funds out after age 59 ½, you do not pay any taxes. Another nice feature of the Roth IRA is that you can take out your contributions at any time without tax or penalty! Remember that you already paid taxes on your contributions, so you don’t have to pay again if you withdraw the funds prior to 59 ½. Very Simple.
If you want to put in more than $5,500 or $6,500, and you have no other employees, a SEP is an excellent savings plan. You can put quite a bit more money away for your future. Also, a SEP has very minimal administrative requirements. You just need to fill out this form (PDF). Like an IRA, you can fund your SEP with a wide range of options from conservative to aggressive investments. You can contribute 25% of your gross income or, roughly, 20% of your net income. The maximum you can contribute for 2015 is $53,000.
A good strategy for a SEP, if you work with a spouse and split income, is to fund a SEP for both spouses. This might allow you to do a lot more. The key is that each spouse has to get the same percentage. So, if you do 5% of income for one spouse, the other gets 5%; if one gets 10%, the other gets 10%; and so on. All in all, the SEP IRA is a great option and slightly more complex than an IRA.
These plans are for self-employed (and maybe their spouses). Like SEP’s, they work for people that are doing well and want to save a lot for their future. They might work really well for people that generate a good income, have low expenses, and want to save the absolute maximum they can. In these cases, if you do a SEP IRA, you might be limited to how much you can save. However, with a Solo 401k, the individual could save a lot more in their plan. Since they are 401k plans, they have more requirements than the SEP. Solo 401ks are more complicated and a bit more costly than SEP IRA’s.
This is for small employers (can’t have more than 100 employees) who want an easy plan to administer and are willing to put some money in for their employees. You will have do one of the two following contributions for your employees: match what they put in up to 3% or make a contribution to all your staff of 2%. With a Simple IRA, all employees can contribute up to $12,500 or $15,500 if you are over 50. The benefit of this plan is that it does not have any testing, filing or plan document requirements. You just have to provide annual notices to the staff. These plans are not as simple as IRA’s, but still very simple.
If your business is up and running and you want a real plan with all the bells and whistles for you and your staff, this is the plan. You will have access to plan design features like eligibility, a vesting schedule, loan and hardship withdrawals, etc… You can determine if you want to put anything in for your staff and whether or not it will be a match or you can decide to just give them a contribution. 401k plans require a plan document, fiduciary oversight, a Form 5500, and other regulatory issues.
You can save up to $18,000 on your own contributions plus another $6,000 if you over 50. Great, right? Well, not so fast. Unfortunately, a 401k plan has to be “tested”, and that may limit, quite a bit, what you can contribute to the plan. You will also have to pay for ongoing record keeping and support. Most employers look for some sort of advisory support as well. On the complexity scale, these are definitely complex. You will likely want professional guidance on this.
A Simple 401k is a combo between a Simple IRA and a 401K. Like the Simple IRA, you have to fund a match up to 3% or put in 2% for everyone. In addition, it offers many of the features of the 401k without the testing issues, which is nice. Of course, you cannot contribute as much as a normal 401k plan. Ouch! You are limited to $12,500 if you are under 50 and $15,500 if you are 50 or over. These plans require a form 5500 and a plan document. They are quite a bit more complex and costly than Simple IRA plans, and slightly less complex than a standard 401k.
Safe Harbor 401k Plan
If you want to contribute the maximum, up to the $18,000 or $24,000 limit, and are willing to put in some funds for your employees, this might be your plan. Safe Harbor plans are very popular. The key benefit is that they avoid the tests that may limit what you can contribute. Many smaller employers, as well as larger employers, use a Safe Harbor 401k plan. You have to commit to funding 3% for each eligible employee or offering a match which is slightly more generous than 3%. Also, immediate vesting is required. Definitely as complex and costly as a standard 401k plan. A note about 401k plans: They are clearly more expensive than the other plans mentioned, but don’t think you can’t have one if it works best for your organization! There are many options for smaller employers to get a 401k plan at a very, very reasonable price.
There you go. Probably more than enough to choose from. Good luck!
This post does not cover all the details for each of the options. There are a few more options not listed but they typically only apply to a small minority of self-employed individuals and are far more complex and costly to administer.
I am the Creator and Founder of PlanVision, a firm that charges amazing low fees to help smaller employers have better retirement plans. You can contact me directly at firstname.lastname@example.org or toll free at 855 965 4286.