Using the best retirement option for your business.
When you’re a small business owner, your focus tends to be on the here and now or the foreseeable future, not what is going to happen ten, twenty, or thirty years from now. But looking that far forward can provide you with benefits then and now, as the government has provided a number of ways to save for retirement that give you tax advantages today.
There are several different plans available that allow both the business owner and their workers tax-favored benefits for today that simultaneously allow them to save for their future. Employers can make tax-deductible contributions for themselves, but also for their employees, and those contributions can earn tax free until distribution time. The plans that are available include:
- Individual 401(K) Plans – Most people have heard of 401(k) plans that are available through large employers, but there are also individual 401(k) plans specifically created for small businesses. This option has additional benefits, allowing the owner to make contributions up to 25 Percent of the employee’s compensation as well as an additional salary deferral of $18,000, up to a maximum of $53,000. Additional $6,000 can be contributed for those over the age of fifty, and the owner has the advantage of being able to deduct the contributions and deferrals from their taxes. Employees are also able to make tax deductible contributions up to $18,000, with the same additional $6,000 available for those over the age of fifty who want to catch up on their retirement savings. These plans also allow employers to match the contributions that their employees make.
- Savings Incentive Match Plan For Employees (SIMPLE) – This plan provides a limit of $12,5000 for either employer or employee to contribute to the retirement plan. The business owner is able to take a deduction while the employee gets the tax-advantage of using it as a salary deferral. Employees who are fifty or older are able to contribute an additional $3,000 per year to catch up on their retirement planning. The business owner can make a non-elective contribution of up to 2 percent of compensation or match up to three percent of compensation.
- Qualified Plan (Keogh) – Keogh plans can be difficult to understand, as there are a few different variables available. Though contributions can be made after the tax year is over, they must be in place by the end of the tax year, and the options include making a discretionary contribution into a mandatory money purchase plan, a profit sharing plan, or a combination of the two. Most small business owners opt for a Simplified Employee Pension Plan, or SEP.
- Simplified Employee Pension Plan (SEP) – This is among the most simple options available, and allows contributions to be held in IRA accounts rather than in an established plan. The contributions that can be made are limited to either $53,000 or 25 percent of the participant’s annual compensation (up to $265,000), whichever is lower. Contributions to a SEP can be made up until the tax filing deadline, after the tax year is completed.
Business owners who are considering one of these pension plans are able to take advantage of another benefit, the “small employer pension startup credit.” This can be taken for each of the first three years of the plan, and provides fifty percent of the expenses for administrating the plan and educating participants about the retirement benefits offered.
These expenses may include fees paid to consultants, set-up fees charged by financial institutions, and changes that need to be made to the payroll system to enable the deductions and contributions to be made. The maximum credit that can be taken is $500 per year, with expenses that exceed this amount able to be claimed and deducted as ordinary business expenses. The three year starting point begins with the tax year that the plan becomes effective or the preceding tax year, whichever the business owner wishes.
If you are considering establishing a qualified retirement plan for your small business and would like more information about the advantages and benefits, call us today at (813) 600 3199 to set up a convenient appointment.