There are quite a few different retirement options out there and many specifically designed for small businesses
If you are a small business owner, you may be seeing a slight uptick in your business – and your confidence. In fact, many small business owners are starting to think about hiring a few more people, and perhaps even offering a few employee benefits again … such as a retirement savings plan. Stuart Robertson of Forbes recently wrote a brief, concise overview of the top three retirement plans available for small businesses (those with 25 or fewer employees).
Before you start researching options, Forbes suggests you ask yourself these five questions:
- Can I afford a match for my employees?
- Do I want to allow employees to contribute to the plan?
- If so, will some want to save more than $11,500 a year?
- Do I need flexibility to access the funds prior to retirement for emergencies?
- How important are managing future taxes (a Roth option) versus my tax needs today?
Your answers to these questions will help you choose between what Forbes considers the top three options: the 401(k), the SEP IRA, and the SIMPLE IRA.
The 401(k), which is probably the most well known, is also the most versatile in that you can choose to match employee contributions or not and provide a vesting schedule. It’s also versatile for employees in that you can enable penalty-free access to the funds (by way of loans) and offer “catch-up” contribution opportunities to employees over age 50. Finally, you could also elect for Roth 401(k)s that switch taxation to contribution rather than distribution, if you or your employees fear higher taxes in the future.
The SEP IRA, or “Simplified Employee Pensions” is exactly that, the modern equivalent of a pension. It means that only the employer contributes to the fund, and must do so for all employees, rather than the employee contributing and the employer matching or not. The penalties are generally smaller, and it’s fairly easy to start, but this is because it is fairly stripped down in comparison to the 401(k) as there is no Roth, no catch-up contributing, no profit-sharing, and no loan option.
The SIMPLE IRA or the Savings Incentive Match PLan for Employees, offers the third option and lies somewhere in between the previous two. It is affordable, like the SEP IRA, but it operates by employer matching of employee contributions and offers catch-up options. Nonetheless, it is not quite as expansive as the 401(k), offering fewer options and having smaller contributions allowances.
These of course, are just outlines to get the ball rolling, and although more information can be found in the original article (which has a helpful chart) you will also want to consult your professional advisor.
Tags: 401(k), IRA, retirement plan, SEP IRA, SIMPLE IRA, Small business