When you’re an entrepreneur operating a small business, your time is filled with lots of various tasks. You may barely have time to breathe, much less think about a retirement savings plan. However, your long-term retirement plan is important for your and your family’s future security, so you need to make sure you have a strategy in place.
When you are an employee, your employer will usually offer a retirement plan that you can join and invest in. Just fill out a form with all the information and it’s all set up for you. You may have some options as to different investment opportunities, but otherwise, it’s mostly standard for all employees of the company.
Retirement Plans to Consider
When you’re self-employed or the owner of a business, the responsibility for every decision ultimately rests with you. That includes selecting a retirement plan and setting up a strategy for you and your employees. This post will provide you with some resources and tips for creating a retirement strategy and establishing a plan.
Solo 401(k) Plans
If you are a business owner with no employees, you can qualify for the solo 401(k) retirement plan. Your business can be classified as a sole proprietor, partnership, C corporation, or S corporation There are no age or income restrictions, but other stipulations on eligibility include:
- Contributions are limited to $58,000 in 2021, with an additional $6,500 catch-up contribution if you are 50 or older.
- If it’s a traditional 401(k) plan, contributions are pre-tax and distributions are taxed as income. Roth 401(k) contributions are after-tax, but distributions are tax-free.
Although the qualifications stipulate no employees can work for you, you may cover your spouse under a solo 401(k) plan if they earn income from your business. This benefit can help increase your overall family contribution.
Simplified Employee Pension (SEP) Plan IRA
A simplified employee pension (SEP) is an individual retirement account (IRA) available to an employer or a self-employed person. Employers, not employees, may make tax-deductible contributions on behalf of eligible employees (including themselves) to their SEP IRAs. SEP IRAs are tax-deferred accounts and have the same investment options as traditional IRAs.
Advantages of a SEP Plan to a business owner include:
- Contribution limits are higher than traditional IRAs.
- The plan allows employers to adjust the amount they contribute, and even skip contributions during years when business is down.
- A trustee of the plan sets the limits on investments, which are managed by the employees. This relieves the business owner of that responsibility.
In order to qualify for participation in a SEP plan, an employee must:
- Be at least 21 years of age
- Have worked for the employer during at least three of the past five years
- Have received a minimum of $600 compensation from the employer in the current year
Savings Incentive Match Plan for Employees (SIMPLE) IRA
The SIMPLE IRA is another retirement plan option for small businesses. Eligibility requirements include:
- Any business with 100 or fewer employees that doesn’t already have another retirement plan can establish a SIMPLE IRA plan.
- Employee participation has no age restrictions.
- Employees are eligible if they received at least $5,000 compensation in either of the two preceding years and are expected to earn at least that amount in the current year.
Business owners have two options on their contributions when establishing a SIMPLE IRA plan.
- One-for-one employee contribution match, up to 3% of the employee’s pay.
- 2% of employees’ compensation, with a maximum contribution of $290,000 for the year 2021.
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) 401(k)
The SIMPLE 401(k) plan is a cross between the more familiar SIMPLE IRA and a traditional 401(k) plan. If your company employes 100 or fewer people, you can set up this retirement plan. The SIMPLE 401(k) plan is similar to the traditional 401(k) plan, except employee contributions are limited to a lower annual amount and employers MUST contribute to the employees’ SIMPLE 401(k) accounts.
To participate, employees must:
- Be at least 21 years old
- Worked at the company for at least one year
- Received at least $5,000 pay in the preceding year to participate in the plan.
Tax Incentives for Retirement Plans
The IRS has offered benefits to start up certain retirement plans. If you qualify, you can claim a tax credit of up to $5,000 for each of the three years after establishing a retirement program.
To be eligible for the credit, you must meet the following criteria:
- You employ 100 or fewer employees with compensation of at least $5,000.
- There was at least one participant in the retirement plan who was a non-highly compensated employee (NHCE).
- Your employees who received contributions in the three years prior to the claim year didn’t receive benefits from another plan sponsored by you.
Don’t Ignore Your Future
Reaching the goals you have for your business is very important to your success. But your future post-retirement plans should be a priority.
There are many options and details to consider when deciding which retirement plan is right for you and your business. If you need help interpreting all the fine print, Orcutt & Company a call. We’ll help you analyze your options and make the best decision for you.