As a small business owner, are you ready to set up a retirement plan that meets your needs and provides you with tax-deferred savings? There are four options to choose from, depending on your goals and entity type. We will outline what to consider when selecting a plan and some basic information regarding set up and administration. Let’s take a look.
The Different Plans
1. Simple IRA
Is this plan for me?
A Simple IRA is available for sole proprietorships, partnerships, C corporations, and S corporations with one-hundred (100) employees or fewer and for self-employed individuals.
Advantages
A Simple IRA requires the least amount of administrative work. There are no account fees or minimum balance required to open an account. Depending on which brokerage firm you select, there are a wide range of investment choices.
Additional Information
A Simple IRA does not require employer tax filings. However, certain annual employee notifications must generally be made no later than November 1. As an employer, you will need to establish this type of plan no later than October 1.
An employee can contribute up to $13,000 in salary deferrals a year ($16,000 if age 50 or older). The employer will either match participating employees’ contributions with up to 3 percent of compensation OR contribute 2 percent of each employee’s compensation, not exceeding $5,600.
2. SEP IRA
Is this plan for me?
A SEP IRA might be the appropriate choice for self-employed individuals or small business owners with no employees. If a contribution is made on behalf of ANY employee, it must be made on behalf of ALL employees (at the same percentage of compensation).
Advantages
This plan is very flexible. It is easy to set up and maintain and does not require any additional tax filings by the employer. It has a wide range of investment choices as well as flexible, annual funding requirements. As an employer, you don’t have to contribute every year. If you are having a down year, you can contribute a small amount or not at all.
The deadline for setting up and contributing to a SEP IRA is established by the employer’s tax filing deadline. This makes a SEP IRA plan great for procrastinators, as you can still set it up and fund it for the prior tax year.
Additional Information
The only entity that can contribute a SEP IRA is an employer – employees do not contribute to this type of plan. In 2019, employers can contribute up to 25 percent of an employee’s annual compensation, for a maximum amount of $56,000. Employees must be notified of contributions made by the employer.
3. Self-Employed 401(k)
Is this plan for me?
This plan is specifically designed for self-employed individuals or small business owners who DO NOT have any employees, other than a spouse.
Advantages
This plan has a potentially higher contribution limit than a SEP IRA with a wide range of investment choices. A Self-Employed 401(k) is funded by employee deferrals, as well as employer contributions. An employee can contribute up to $19,000 in salary deferrals in 2019 ($24,500 for employees 50 or older). An employer may contribute up to 25% of compensation, up to a maximum of $56,000. It is important to note that the total contributions made by employee and employer cannot exceed $56,000.
Additional Information
As an employer, you will need to file an annual Form 5500 after plan assets exceed $250,000. The employer must establish this type of plan by December 31 (or fiscal year-end).
4. 401(k)
Is this plan for me?
A 401(k) the most versatile plan as it covers any type of public or private company. Generally, it is best suited for companies with twenty (20) or more employees.
Advantages
A 401(k) offers a lot of flexibility in plan design; however, keep in mind that it is the most expensive type of plan to administer. The account setup fees and deposit requirements will vary by the type of 401(k) you set up.
The plan is funded by employee deferrals and employer contributions. Most plans allow an employee to deposit up to $19,000 in salary deferrals ($25,000 for those 50 or older). However, there are limits that may vary by plan. Employers can make a matching contribution or profit-sharing contribution of up to 25 percent in compensation, with a maximum of $56,000. The total of both employee and employer contributions are not to exceed $56,000 per employee.
Additional Information
As an employer, you will need to file a Form 5500 annually and perform special IRS testing to ensure that your plan does not favor highly-compensated employees. You will generally hire a TPA firm to administer the plan on your behalf. The deadline for setting up this type of plan depends on the plan selected.
*Disclaimer*
Sharp Point Accounting Solutions does not provide legal advice. The information herein is general in nature and should not be considered legal advice. Please consult an attorney regarding your specific situation.
As tax professionals here at Sharp Point, we would be happy to assist you with your tax inquiries. Please contact us so we can help you decide on the most advantageous retirement plan for your specific situation. Let’s get started today!