Choosing a retirement plan as a small business owner can be an overwhelming process. It is never too early to start planning for your future. Here are four readily available small business retirement options every entrepreneur should consider.
1. Small Business or Self-Employed 401(k)
As a business owner, when you think of retirement planning you likely think of a 401(k). Perhaps you even think fondly of the small one you left at your old corporate job. Most of the big banks like Wells Fargo, or asset managers like Fidelity offer what they call a “Small Business 401(k)” or the other variation, a “Self Employed 401(k).” Generally speaking, if you’re going to go this route, these packages are the best. Traditional 401(k) plans were designed with corporate contributions in mind, and can thus be too big of a load for small organizations.
To review, a 401(k) is essentially like contributing a portion of your income to a very low risk mutual fund. Contributions go into a pool of managed investments to help compound or grow your investment. Contributions are done on a pre-tax basis and thus you can defer some of your income tax burden. 401(k) contributions stay with you and can be rolled over if you change careers. They can also be cashed out early, but at a taxable and fairly steep penalty.
The major difference between a self-employed and small business 401(k) is the amount of set up and associated fees. For an individual and their spouse, the self-employed plan will get both of you in a 401(k) without set up fees, and with the added bonus of tax advisory services.
In contrast, a small business 401(k) includes set up fees for multiple employees that are scaled to the size of your business. Your selected financial institution will handle tax advisory and allocation within the portfolio. As such, you’ll want to look through each plan’s prospectus to get a sense of how your contributions will be allocated to equities and any additional resulting fees.
2. SIMPLE IRA Plans
The SIMPLE IRA is an IRA plan for companies with fewer than 100 employees. Contributions are done on a pre-tax basis, usually as a payroll deduction. This plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions.
Employers must either match employee contributions dollar for dollar – up to 3% of an employee’s compensation – or make a fixed contribution of 2% of compensation for all eligible employees, even if the employees choose not to contribute. Employers can choose to automatically enroll all new employees in this plan, but they also have to allow an opt-out.
Most financial institutions will offer the option to set up a SIMPLE IRA for your business by filling out a pretty basic form. The basket of savings options will be pretty conservative, such as CDs or maybe just the prime rate (when it returns). If you already have business banking with one institution they may also include incentives to set up your SIMPLE IRA with them.
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