3. Simplified Employee Pensions (SEPs)
A SEP plan allows employers to set up SEP IRAs for themselves and each of their employees. Employers must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year – this is where things start to get a little tricky. Retirement plans work best for both the employee and the employer when contributions are well-defined and automated. It’s very easy in a tough year, or on a thin paycheck, to justify skipping a contribution. However, the allowance to skip in an SEP can also be an advantage if your business has a really bad year.
SEPs require a slightly more in-depth form than the SIMPLE IRA plan mentioned above, and are generally available at all large financial institutions. Your community bank may have this option as well, although fees and advisory services are going to vary institution to institution. Like the SIMPLE IRA the basket of savings options for your contribution will be very conservative.
Because this is a pension plan, employee contributions aren’t necessarily part of this as a package deal. As such, you’re going to want to take a hard look at these plans and your possibility for contribution. Transparency with employees will also be critical so everyone understands the scope of any pension benefits versus an IRA with a mandated employee contribution.
4. Retirement Oriented Profit Sharing
If you’re really unsure about where your businesses is headed, or can’t justify the costs of setting up an IRA or 401(K) plan for your business you might look to a profit sharing arrangement that is retirement-oriented.
Profit sharing plans are, in general, entirely discretionary. This means you can set the threshold at what they will kick in and how they will be dispersed. You may choose to usher in profit sharing into a very loose IRA arrangement, without defined contributions but you will also lose out on a lot of the tax advantage.
Profit sharing agreements typically kick in at the end of a fiscal year when all the expenses have been tallied up. As such, you’ll be working with post-tax net profit instead of pre-tax gross. Profit sharing is still an option, and can make employees feel empowered to achieve, although it will require more work on your part as the employer and may come at the expense of some tax and savings efficiencies.
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This article was prepared by Funding Gates contributor, Bailey McCann. Funding Gates in the online accounts receivable software for small businesses. Allowing businesses to track, organize and manage receivables all with simple clicks, Funding Gates is helping small businesses get paid faster. Funding Gates’ advice can be seen on AMEX Open Forum, AllBusiness, SCORE and many other small business sites.
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Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness and many more. Meredith is also the Senior Financial and B2B Correspondent for AlleyWire. Connect with Meredith on Twitter @Mere_Wood.
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