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Retirement Planning for Small Businesses

By Caitllin Koppelman
for Jackson Magazine

Planning for retirement as a small business owner is important for you and your employees. Small businesses have unique needs. Thankfully, you have various options when it comes to retirement plans and a little bit of exploration can help you find a solution that best fits the needs of you and your employees. 

Some of your retirement plan options include:  

  • SEP IRAs
  • SIMPLE IRAs
  • Traditional or Safe Harbor 401(k)s
  • Profit-sharing plans

Simplified Employee Pension (SEP) IRAis funded by employer contributions. Benefits for all employees must be uniform (ie: the same percentage of compensation). Contributions are limited to the lesser of either 25% of the employee’s compensation or $55,000 per year. SEP IRAs allow you a relatively low-maintenance way to contribute to your employees’ retirement, and contributions are deductible by the employer for income tax purposes. 

Savings Incentive Match Plan for Employees (SIMPLE) IRA allows for both employer and employee contributions. Employee contributions are limited to $12,500 per year, and employers have to either match up to 3% of employee contributions or contribute 2% of the employee’s salary. 

Like a SIMPLE IRA, a401(k) Plansallow employees to save money in a tax-deferred account for retirement. Traditional 401k plans hold “pre-tax” money, so the money will be taxed when it’s withdrawn from the account for retirement expenses. 401k plans can be set up to allow Roth (or “after-tax”) contributions as well. Employees can contribute a regular amount into the account, straight out of their paycheck. 401k contribution limits are significantly higher than Traditional IRA limits. An employee could defer $18,500 for 2018, plus an additional $6000 if he/she is age 50 or over. Employers can choose to match funds contributed by employees. Keep in mind that 401k plans require a bit more administrative work and legal documentation. A Safe Harbor 401kplan mandates employer contributions. 

Profit-sharing Plangives employees a portion of company profits. Employers have a great deal of latitude when it comes to contributions: employers can give as much as they want (up to the annual contribution limit, which is the lesser of $55,000 per year or 100% of the employee’s compensation) or none at all, depending on the year’s profits. Contributions do have to be distributed proportionately to the employees. The administration of a profit-sharing plan can be burdensome for some employers, depending on the number of participants in the plan. 

There are two major things to consider when selecting a plan: contributions and administration. If you’re considering starting a plan for yourself and your employees, you should discuss your options in detail with your financial advisor and your CPA.  

 

*information adapted from an article written by Advicent Solutions, an entity unrelated to GuideStream Financial. 

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