If you run a small business, it is easy to focus so much on the business that you neglect retirement planning. April is a great time to take stock of where you stand with your personal finances. When you complete your taxes, take a look at your retirement plan.
Sound retirement planning can make your life easier when you stop running your business. As an added bonus, if you have employees, a solid retirement plan helps you recruit and retain top talent. Many industry studies reveal that retirement savings plans offered by employers helps them attract top job seekers.
A small business owner can select from several options when establishing a retirement plan for the business. In the list below, we provide an overview of a few options and links to resources with additional information.
You can contribute to a traditional IRA as long as you meet some basic requirements:
- You must be younger than 70 ½ by the end of the contribution year
- You must receive taxable compensation (or self-employment income) for your contribution year
- If you want to establish a spousal IRA, you and your spouse must file a married-joint income tax return
- Easy to set-up
- Contributions are tax deductible
- Earnings grow on a tax deferred basis
- No income restrictions
- Penalty for early withdrawal
- Contributions are limited (in the 2015 tax year you can contribute: $5,500/ $6,500 if you’re age 50+)
- Distributions required after age 70 ½
- The IRS will tax your distributions
- There are deductibility limits if you and/or your spouse are covered by a retirement plan
The IRS sets limits on who can use a Roth IRA. This type of IRA is well-suited to young investors in lower tax brackets. Since the contributions are after tax, older workers (with typically higher tax brackets) cannot shield income from taxes with a Roth IRA.
You can contribute up to $5,500 in a Roth IRA, if you are younger than 50 during the contribution year. If you are older than 50, you can contribute up to $6,500
For the tax year 2015, the IRS established the following requirements. Contributors (to fully contribute) must be:
- Single (or head-of-household) and not have earnings greater than $116,000 (with phase out up to $131,000), or
- Married and filing jointly or a widow(er) and not have earnings greater than $183,000 (with phase out up to $193,000)
- Married filing separately and not having earnings greater than $10,000
For more information on Roth IRA eligibility, visit this link: http://www.rothira.com/roth-ira-eligibility
- No age restriction (you can contribute after age 70 ½)
- Distributions (withdrawals) are tax-free, without penalty after 59 ½
- No minimum distribution requirements
- Income restrictions
- Contributions are not tax deductible
Note: You can convert a traditional IRA to a Roth IRA, provided that you pay the necessary taxes on the conversion. Speak to a CPA or financial planner before you make that transition.
As an employer and small business owner, you have several options for contributing to your IRAs for you and your employees.
A Simplified Employee Pension (SEP) IRA is available to small business owners. A SEP IRA works well for single-person companies that do not plan to hire additional employees.
Setting up a SEP IRA is a little more complicated than a traditional IRA or a Roth IRA. The contributions come from the employer, not the employee.
To establish to a SEP IRA, you must have employees. If you are a single-person company, you count as an employee. To contribute a SEP IRA, you need to meet the following requirements:
- Your annual earnings must be greater than $600
- You must be at least 21 years old
- You must have worked for the employer for 3 of the past 5 years (not necessarily consecutively)
If you are the employer, you must meet all of the above requirements, plus the following:
- All eligible employees must participate in the plan
- Participants can only contribute to the plan if the employer establishes the plan by the due date (including extensions of the company’s tax return)
- You can contribute a higher amount than other IRA plans (up to 25% of income in some cases)
- Contributions are tax deductible
- No catch-up contribution amounts available for older contributors
- Employee cannot make contributions
For more information on SEP IRAs, visit this link
A Savings Incentive Match Plan (SIMPLE) IRA is available for business owners with less than 100 employees. Employers can defer a portion of each employee’s salary directly into a SIMPLE IRA.
Employers can establish a SIMPLE IRA if they do not maintain any other qualified plans. These plans must generally cover every employee who earned at least $5,000 in compensation during any of the preceding two years.
- Employer contributions are tax deductible and employee contributions are pre-tax
- Low maintenance and low annual fees
- You can offer salary deferral to your employees
- Higher contributions allowed (up to $12,500 in salary/yr and $15,500 for employees 50+)
- Mandatory matching (you must match the contributions of each participant, up to 3%)
- Higher penalty for early withdrawal (up to 25%)
For more information on SIMPLE IRAs vs. SEP IRAs, visit this link.
What about a 401 (k) as a retirement plan option for small businesses?
You can also set-up the more complicated 401 (k) plans and select a Solo 401 (k) or a SIMPLE 401 (k). These plans are more complex to establish and expensive to maintain. If you want information on these options, visit this link.
If you have questions about the best retirement plans for your specific situation, please contact us.