Tax Tips from the Tax Lawyer: What Retirement Plan Fits Your Business?
Whether your business is considering an IRA, 401(k), pension, or any other retirement plan option, it’s crucial that you find the best fit for your business size, future growth goals, and tax needs.
Retirement plans keep you and your employees on the right long-term financial track. They not only save money for both yourself and your business, they also modify how you pay taxes. Another major perk is that with the right retirement plan benefits, you ensure that your business stays competitive in the hiring market.
So, let’s take the confusion out of retirement packages and examine how each possibility impacts your taxes and long-term financial interests.
Simplified Employee Pension (SEP) IRA
Tax Tip: SEP IRAs are great for self-employed individuals or small business owners of Sole Proprietorships, Partnerships, Corporations, and S Corporations. They offer easy to set up and a low cost.
SEP IRAs have a quick and easy set-up process and do not require maintenance fees. That makes them appealing for small businesses with a smaller budget. One thing to keep in mind is that SEP IRAs offer large contributions compared to Roth IRAs—the lower of 25% of your income or $53,000. Your tax-deductible contributions go into a traditional IRA account and are not taxed until they are taken out.
A potential problem is that the employer makes 100% of the contributions in a SEP IRA. Employees do not make individual contributions. Beyond that, all employees in your organization are required to participate. That aspect is appealing to employees, but it can make growth more expensive for the business.
Savings Incentive Match Plan for Employees (SIMPLE) IRA
Tax Tip: SIMPLE IRAs work for businesses with a staff of 100 or fewer employees, including Sole Proprietorships, Partnerships, Corporations, and S Corporations. They require your business to match employee contributions.
The primary difference between SEP and SIMPLE IRAs is that with a SIMPLE IRA, your business is required to match employee contributions up to 3% of their salary or 2% of pay.
While there is some cost associated with a SIMPLE IRA, fees are lower than other plans. Your set-up costs will end up being either $25 per participant or a $350 fee for the plan as a whole. Also, like SEP IRAs, you have higher contribution limits than a Roth IRA.
One drawback is that if you are contributing to a 401(k) elsewhere, all contributions to a SIMPLE IRA will count against your 401(k)’s contribution limits. SIMPLE IRAs are also limited to small companies with a cap of 100 employees, and early withdrawal penalties are relatively high—as much as 25%.
Tax Tip: Self-employed 401(k)s are perfect for small businesses with no employees other than their spouse, or corporations with no common-law employees. They give you the ability to contribute a larger amount to your retirement.
Self-employed 401(k) plans have a very flexible approach to contributions. For instance, your contributions are able to fluctuate each year and, if you are over 50, you can make a “catch up” contribution of up to $6,000. Contributions after the pre-tax limit are allowed, as they are converted into Roth solo 401(k) designated funds. Also, if your spouse does work as an employee for your small business, you can contribute to their plan as an employee and as an employer, offering greater potential savings.
If you’re looking for a very simple plan, however, a 401(k) might not be for you. With self-employed 401(k) plans, it’s crucial that you have a plan administrator, which means higher fees. You will also be required to file additional tax paperwork with the IRS, including Form 5500-EZ.
Looking to set up a self-employed 401(k)? We recommend seeking trusted advice as soon as possible.
Defined-Benefit Plan (Pension)
Tax Tip: Defined-benefit plans are best for businesses looking to have company-wide savings contributions that payout based on the duration of employment and other formulas.
While Defined-Benefit Plans are less popular these days, they do have some perks. For instance, you can combine Defined Benefit Plans with other retirement savings. Also, pension plans allow you and your employees to develop substantial benefits over a short period of time.
The catch is that Defined-Benefit Plans are the most expensive to set up and maintain. Businesses will need an enrolled actuary to file taxes and will pay high minimum contribution requirements. In addition, excise taxes can be applied if you either contribute too little or too much each year.
Thanks for reading our tips for choosing your business retirement plan. Mendes Weed, LLC is ready to work with you to pursue your best interests. Give us a call today.