Government Incentives Make Choices Attractive
As a small business owner, your mind is likely on the everyday needs of your operations rather than on how you’ll spend your retirement – or what you’ll live on when you do retire. But even the smallest business can get big benefits from the incentives that the government is offering for making retirement contributions, and there are a number of great small business retirement plans available that not only provide a benefit for you but your employees as well.
One of the biggest advantages of the various retirement plans is that they not only allow you a tax-advantaged way to put away money for the future, but many of them offer the ability to do so with contributions that are tax deductible. Having money set aside and growing for your retirement without worries of paying taxes until distributions are made is a great benefit for employer and employee alike. Here are some of the choices that are available:
- Qualified Plan (Keogh) A Keogh can be either a mandatory contribution money purchase plan, a discretionary contribution profit sharing plan, or a combination of the two. Though Keoghs offer these options, they are generally considered to be overly complicated for small businesses and self-employed individuals, and as a result most opt for a SEP plan instead. The limitations for deductible contributions in 2015 are $53,000 or 25% of the participant’s compensation up to $265,000, whichever is less. Keoghs have to be set up prior to a tax year’s end, but contributions can be made after the tax year is over.
- Simplified Employee Pension Plan (SEP) This popular type of plan allows contributions to be made in a simplified way, holding funds in the beneficiaries’ IRA accounts and avoiding the complications presented by a qualified plan. The limitations for deductible contributions in 2015 are $53,000 or 25% of the participant’s compensation up to $265,000, whichever is less. SEPs can be set up and contributions made after the tax year is over.
- Individual 401(k) Plan This plan is very much like the 401(k) plans that most people are familiar with, but they offer some additional advantages for the owners of small businesses. For tax year 2015 contributions and deductions can be made by the owner up to $53,000 maximum, or $59,000 for those over fifty, with the contributions consisting of up to 25% of compensation and an additional salary deferral of $18,000. The limit for salary deferral and contributions for employees is $18,000, though those over the age of 50 are provided the opportunity to make an additional $6,000 contribution to allow them to catch up. These plans are also eligible for employer matching of their employees’ contributions.
- Savings Incentive Match Plan for Employees (SIMPLE Plan) This straightforward plan allows the small business owner to take a deduction while allowing a salary deferral for employees. The limitation for deductible contributions in 2015 for both employee and employer is $12,500, though those aged 50 or older are provided the opportunity to make an additional $3,000 contribution to allow them to catch up. These plans are eligible for employee matching of their employees’ contributions up to 3% of compensation – they can also make a non-elective contribution of 2%.
Setting up a new qualified pension plan for your small business may provide you with an additional benefit: you may be able to take a credit called the “small employer pension startup credit,” which is defined as half of expenses for administration and retirement related education for the plan for each of its first three years.
The maximum credit that can be taken each year is $500, though expenses that exceed the limit are able to be written of as ordinary business expenses. The timing of this credit is based upon when the plan first becomes effective, with the first credit being taken either in the preceding year or in that year. The types of expenses that fall into the category of qualifying expenses include set-up fees for investment vehicles, changes required to the payroll system, and consulting fees.
For more information on setting up a small business retirement plan for your employees, or if you would like to discuss other deductions and incentives that may be available to you, contact us at 337-528-2272.