Small Business Owner Retirement – No More Socks under the Mattress!
Many small business owners believe putting a small business retirement plan into action will either cost too much money or take up too much of their time in administration duties or compliance with government regulations.
This is simply not the case. There are options that allow the small business owner and his or her employees, if any, to not only build a nest egg but a comfortable one. These small business retirement options offer low annual operating costs, call for little fiduciary responsibility and are easy to administer with minimal reporting to governmental entities. Small business retirement plans also offer tax advantages, higher contribution limits, “catch up” rules for employees over 50 and currently some tax credits up to $500 per year for the first 3 plan years.
The Individual Retirement Account or IRA or Roth IRA are basic savings vehicles that allow individuals tax advantages like tax free growth. However, they simply do not allow the participant to contribute enough money with a maximum contribution limit in 2011 of $5,000 (or $6,000 if age 50 or older).
Two small business retirement plans are SEP IRAs and SIMPLE IRAs. These options are designed specifically for the self employed and small business owners. There are different eligibility requirements and contribution limits. There are penalties, of course, for withdrawing money too soon.
The SEP IRA, or Simplified Employee Pension, is a type of traditional IRA designed for those who have self-employment income or for business owners with at least one employee. In 2011, the participant can contribute up to 25% of income or $49,000, whichever is less. Funding the plan is flexible and not required by the business owner every year. However, when there are contributions, the accounts of all eligible employees must be contributed to by the business owner only. The SEP is inexpensive to operate and very simple to set up - even easier if there are no employees. There is no annual filing requirement for the employer.
SIMPLE IRAs (Savings Incentive Match Plan for Employees) are similar to SEP IRAs in that they are both types of traditional IRAs. They both allow for higher contribution levels and require the business owner to contribute to the accounts of all eligible employees. However, SIMPLE IRAs also allow the employee to contribute. Overall contribution limits are much lower with SIMPLE IRAs than those of the SEP IRA. Contributions must be made every year with SIMPLE IRAs and, for 2011, cannot exceed $23,000 (employee maximum contribution of $11,500 and the employer dollar-for-dollar maximum contribution of $11,500). If the employee is age 50 or older, the combined maximum contribution is raised by $2,500 to a maximum of $25,000. The SIMPLE IRA can also be set up easily and administrative requirements are limited, even if there are employees. Like the SEP IRA, annual operating costs are low and there is no annual filing requirement for the employer.
The Individual 401(k) is the third small business retirement plan option for the small business owner with no employees whatsoever. By allowing the business owner and his or her spouse, if the spouse earns money from the business, to contribute up to $49,000 each per year, the Individual 401(k) becomes the ideal option for those wanting to build their nest egg quickly. Through the use of a simple formula, a business owner and his or her spouse can contribute up to $98,000 per year to grow tax deferred or tax free. Due to the $5,500 catch-up provision, in 2011, that figure goes to $109,000 if both are 50 or older. The individual 401(k) does come with slightly more administrative responsibilities than the other options, thus adding slightly to the overall cost of the plan. For example, an IRS form 5500 must be filed when assets reach more than $250,000. Overall, however, the administrative services required are inexpensive and simplified.
Retirement planning for small business owners should not be an idea that is just dreamed about but rather a goal that is attainable through smart retirement planning. Relying on social security alone is not a good retirement plan.
The IRS has a helpful Small Business Retirement Plan Resources web page:
http://www.irs.gov/retirement/sponsor/article/0,,id=237400,00.html
The IRS also has a helpful Retirement Plan Navigator web site:
http://www.retirementplans.irs.gov/
There are small business retirement plan options available to help attract and retain qualified and productive employees. A knowledgeable retirement planning professional can be a valuable asset for a small business employer in designing, selecting and maintaining the right plan option and resources.
Feel free to contact us with any questions.
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