Mike's Blog
If you own a small business and you aren’t using a retirement savings plan for yourself or your employees, what are you waiting for? A retirement plan can help you and your employees save for the future.First, there are nice tax advantages of retirement plans, for example, your contributions are sheltered from taxes and aren't taxed to an employee until distributed; and they grow tax deferred. When deciding on which plan to use, it helps to know your goals before picking a plan. For example:
- Maybe you want to maximize your retirement as the owner
- Or allow employer or employee contributions, or both
- Have the flexibility to skip employer contributions in some years
- Or you may just want a low cost plan and easy administration
Two of the more common plans for small businesses are SEPs and Simple IRAs:
A SEP (Simplified Employee Pension) allows you to set up a "SEP-IRA" for yourself and each of your eligible employees if you have them. You contribute a percentage of pay for each employee. You don't have to make contributions every year, which allows flexibility in lean years. For 2015, your contributions for each employee are limited to 25% of pay or $53,000 whichever is less. SEPs are low cost and low maintenance to operate. The plan must cover any employee who has worked for you for three of the last five years and who earns $600 or more.
SEPs are not as popular with small business owners with employees since all the contributions are put in by the employer. Often the owner sees this extra expense as negating the tax advantage he or she desires and is rewarding employees who may not otherwise show initiative to save for themselves.
A SIMPLE IRA (Savings Incentive Match Plan for Employees) plan is more popular with small businesses with employees because the employee is responsible for putting in most of his or her own contributions. If the employee does not participate in the plan, the business owner does not have to make any contributions. These plans are available if you have 100 or fewer employees. Employees contribute up to $12,500 and if you are over age 50, you can add an additional $3,000 catchup contribution for a total of $15,500. The business owner must match the employees' contributions dollar for dollar, up to 3% of compensation only for those employees who are contributing their own money into the plan. Or they can make fixed contributions of 2% for each eligible employee whether they contribute into the plan or not. SIMPLE IRA plans are easy to set up and costs are low, just like the name says, simple!
It is important to know what your goals are in order to help pinpoint the right plan for you. It’s not easy to change plans, so be sure and do your homework.
Retirement plans are a fantastic way of saving for you and your employee’s future, as they offer tax deferral and potential matching and profit sharing features. If you have questions or would like more information, just contact our office!
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.