Making a decision about a retirement plan for your small business

Making a decision about a retirement plan for your small business

A qualified retirement plan can be beneficial to both employers and employees, but the time and effort required to choose one can seem daunting to a small business owner who is busy with day-to-day operations. It is not required to be.

There are two types of retirement plans: qualified as well as unqualified It is desirable to have a qualified plan because it provides a vehicle for tax-deferred retirement savings for the owner of the business as well as the employees of the company, with allowable contributions that are greater than those that are permitted for IRAs.

Additionally, an employer can immediately deduct contributions made to a qualified plan. It can encourage employees to stay with their employer and maximize business profits, depending on the plan. Features can be added as an option to plans. Non-qualified plans can include a wider range of features and provisions because they do not have to meet many of the requirements of qualified plans.

However, for most non-qualified plans, the employer does not immediately receive a tax deduction. In order to defer the employee’s taxes until the money is actually distributed, such arrangements must also prevent “constructive receipt” by the employee.

If the business fails before the deferred compensation is paid out, this typically puts the employee at risk of bad credit. While non-qualified plans can be useful in some situations, the majority of small businesses will prefer one of the plans for qualified plans that are discussed in this article.

All of this can be overwhelming, particularly if personal finance is not your strong suit. Consider purchasing a new car as a way to simplify the process of selecting a retirement plan for your small business. It’s important to think about the retirement plan vehicle that best suits your company’s needs, budget, and size, as well as any desired extras.

Establishing and maintaining your retirement plan will be more expensive the more “tricked out” it is. The SEP (Simplified Employee Pension) IRA is the basic model that gets you from A to B. Custodians like Schwab and T. Rowe Price typically provide a basic form for starting one.

Including extensions, a SEP can be established as late as the employer’s income tax filing deadline. The employer has no further filing obligations after the initial setup. The employer contributes to a SEP for each eligible employee. An employee must be at least 21 years old, have worked for the company for at least three of the last five years, and be paid at least $550 per year to be eligible.

If the employer so chooses, eligibility standards can be less stringent than this. Contributions are proportional to each worker’s income. For 2013, the maximum contribution is 25% of salary, but it can’t be more than $51,000 (or $52,000 in 2014).

Contributions to self-employed SEP-IRAs are subject to the same restrictions as those for employees’ SEP-IRAs. However, special guidelines apply when determining the maximum contribution that can be deducted.) An employer is not required to contribute in a year when cash is scarce. SEP contributions, including extensions, must be submitted by the employer’s tax filing deadline.

A SEP is a great option for a sole proprietorship or a small business with few employees if the employer wants a retirement savings vehicle with more flexibility than a traditional IRA and larger, tax-deductible contributions. A SIMPLE (Savings Incentive Match Plan for Employees) IRA is also simple to set up and does not require employers to file any ongoing paperwork.

Businesses with fewer than 100 employees and no other retirement plan are only eligible for SIMPLE IRAs. These plans can be established as late as October 1 and operate on a calendar year.