If you’re a business owner, you’ve got a lot on your mind — cash flow, competition, marketing and so on. However, you may also want to think about tomorrow. If you don’t already have one, you might want to consider establishing a retirement plan.
Beyond helping you and your employees build assets, a retirement plan is a good way to attract those employees in the first place — and to keep them.
Several states now require business owners without their own plans to offer one and charge significant fines to those who refuse to comply. Some other states are considering requiring such plans. If your state offers one now, or will in the future, look at all the plan’s features — contribution limits, potential tax credits, overall cost, and number and type of investment options — to determine if this plan makes sense for your needs, or if you’d be better off with one of your own choosing, such as the following:
• SIMPLE IRA — A SIMPLE (Savings Incentive Match PLan for Employees) IRA, as its name suggests, is easy to set up and maintain, and it can be a good plan if your business has fewer than 10 employees. However, a SIMPLE IRA can be less generous to you as a business owner in terms of allowable contributions, compared to a 401(k) or SEP. For 2021, your annual contributions are generally limited to $13,500, or $16,500 if you’re 50 or older. You must match contributions made by your employees or make contributions to all eligible employees. The amounts differ, depending on which contribution method you elect as the employer.
• Safe Harbor 401(k) — A Safe Harbor 401(k) plan allows you to defer the annual maximum of $19,500 for yourself (or $26,000 if you’re 50 or older). You must match employee contributions up to certain limits. You also can reward yourself and your employees with profit-sharing contributions up to the individual maximum of $58,000, or $64,500 for those 50 or older. This type of plan comes with administrative obligations and costs. A third-party administrator (TPA) can assist you with meeting these obligations and will charge a separate fee.
• Owner-only 401(k) — This plan, sometimes called a “Solo 401(k)” or “Individual 401(k),” is similar in terms of contribution limits to the Safe Harbor 401(k). The features of an Owner-only 401(k) plan are designed for self-employed individuals and business owners with no eligible employees other than themselves and their spouses.
• SEP IRA — If you have just a few employees or are self-employed with no employees, you may want to consider a SEP (Simplified Employee Pension) IRA. You must cover yourself and all eligible employees, but contributions are discretionary and can vary from year to year. This can be an expensive plan for your business because the contribution percentage you select applies to all eligible employees. Contribution limits are the same as those of a 401(k) plan.
Contributions to all these plans are tax deductible, and tax credits for establishing them are available. The plans listed above are some of the most common, but you may want to explore other plan types that may be beneficial to your business. Consult with your tax adviser and financial professional, or a third-party administrator with retirement plan expertise, to determine which retirement plan is right for your business.
Once in place, your retirement plan can help brighten your financial future and that of your employees. Consider taking action soon.