Put your small business retirement plan to work
If you own a small business, you’ve got a lot on your mind: cash flow, competitors, payroll, and the endless search for new customers. Nonetheless, as busy as you are today, you still need to think about tomorrow. Specifically, are you prepared for the future with an effective retirement plan?
By establishing a qualified retirement plan, you can lower your taxable income through tax-deductible contributions, while building resources for retirement through tax-deferred earnings on your investments.
Here’s an overview of some of the more popular retirement plans available for small businesses:
- Owner-only 401(k) profit sharing plan — This plan, which is also known as Solo(k), is available to self-employed individuals and business owners with no full-time employees other than themselves or a spouse. You may even be able to choose a Roth option for your 401(k), which allows you to make after-tax contributions that can grow tax-free. And you’ll have a range of investments in which you can place your investment dollars.
- SEP IRA — If you have just a few employees or are self-employed with no employees, you may want to consider a SEP IRA. You’ll fund the plan with tax-deductible contributions, and you must cover all eligible employees. You can contribute up to 25% of compensation, up to $61,000 annually. (You will want to consult with your tax advisor to determine your maximum contributions.) Your SEP assets can be used to purchase basically any type of investments you choose — stocks, bonds, mutual funds, and so on.
- Solo defined benefit plan — Pension plans, also known as defined benefit plans, are still around and you can set one up for yourself if you’re self-employed or own your own business. This plan has high contribution limits, which are determined by an actuarial calculation, and as is the case with other retirement plans, your contributions are typically tax-deductible. Your benefits can be based on a fixed percentage of your average salary or self-employment income over your entire career with your small business, or over a certain number of years near the end of your working life. Benefits could also be based on a flat monthly dollar amount or on a formula based on years of service in your small business.
- SIMPLE IRA — A SIMPLE IRA, as its name suggests, is easy to set up and maintain, and it can be a good plan if your business has just a few employees. With a SIMPLE IRA each employee, including yourself as an owner-employee, can defer up to $14,000 of your earned income. If an employee is age 50 and older, they have the ability to do a catch-up contribution for up to $3,000, making their total maximum deferral $17,000. You can also make a matching contribution of up to 3% to yourself. As is the case with a SEP IRA, SIMPLE IRA contributions can be used to purchase essentially any type of investment.
Employer-sponsored retirement plans have become an important component of your total compensation package. They can benefit the business owner but can also be used to recruit employees in a tight labor market. Employers who can provide a solid retirement plan are better positioned to attract and retain the quality people needed to keep a business competitive.
Which retirement plan is right for you? It depends on a variety of factors, including the size of your business, your annual earnings, the age at which you plan to retire, and whether or not your spouse has access to a separate retirement plan. In choosing a plan, you’ll want to consult with your tax and financial advisor. But don’t wait too long — the sooner you start saving and investing for retirement, the better prepared you’ll be when that day arrives.
This article is provided by Beth Norman, CFP, The Norman Fletchall Team. Norman is managing director and a financial advisor at RBC Wealth Management in Madison, Wisconsin. The information included in this article is not intended to be used as the primary basis for making investment decisions. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC
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