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 an individual 401(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 $53,000 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 $12,500 of your earned income. 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.
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 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.
To learn more about choosing the right investments to fund a retirement plan, contact a financial professional.
This article is provided by Lauri Binius Droster, CFP©, The Droster Team. Droster is senior vice president and a financial advisor at RBC Wealth Management in Madison Wis. 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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