Best Retirement Plan Options for Business Owners

Providing employee benefits such as retirement plans and health insurance is important for small businesses, as much for the ability to recruit and retain quality employees as for the financial security of the business owners.  Initially, small businesses may be reluctant to offer benefits due to their administrative burden as well as their perceived costs.  And, while it is true that some types of plans can increase administrative and business costs, by choosing the right kind of plan, the benefits ultimately outweigh the costs.

Whether you are the sole employee or you employ several people, choosing the right retirement plan is critical to ensure that you are providing the optimum level of benefits while controlling your costs. Additionally, as a business owner, it is important to capture every tax advantage available to you.

 

Solo 401k

If you have no or few employees, and your goal is to defer as much as your income as possible, the solo 401k may be your best option. This plan is, in essence, the small business version of the popular 401k used by larger companies.  Compared with other small business options, these plans allow for higher retirement savings contributions, currently $16,500 per year ($22,000 if you are age 50 or older)*.

Additionally, while other retirement plan options, such as the SEP IRA, allow for contributions up to 20% of the owners net business profit up to $49,000, solo 401k plans allow for 100% of your  income up to $16,500, plus 20% of net profit up to $49,000 ($54,000 for ages 50 and older).

If you have employees, they can elect to participate under the same contribution rules.  Most employers provide a match contribution up to 3% of the employee’s contribution, which is tax deductible for the employer.

These plans can be set up through any number of mutual funds or discount brokerage firms which charge a fee for administrating the plans. When the plan’s total assets reaches a certain level, the employer is required to file reports each year which can increase administrative and accounting costs.  Typically a plan administrator can handle this task.

SEP IRA

If you don’t think you will be able to defer anywhere near the maximum amount of income each year, a SEP IRA may be a better option because they are the easiest and least costly to administer. A business owner can contribute up to 20% of net profits to the plan up to $49,000.*

With a SEP IRA, the employer makes all of the contributions on behalf of the employees, however, they are not mandatory, so, if no profits are generated for the year, no contributions have to be made.  Another advantage is that, although all contributions are to be made by the employer, they are not mandatory, so the employer can manage its contributions around the company’s profitability.

SIMPLE IRA

If you have a dozen or more employees and are more concerned with covering everyone with a retirement benefit,   SIMPLE IRA may be your best option. It’s simple to set up and administer and it is the best option for controlling your overall outlay. Employees are responsible for their own contributions which are deducted from their salary. The contribution limit is only $11,500*, but an employer can add matching contributions of 3% of the employee’s contributions.

 

 

*Contribution limits for 2011