small business retirement plans

Small Business Retirement Plans – Prepare For The Future Today

Small business retirement plans can be an intimidating subject for business owners. Not to mention a dull one to boot. Entrepreneurs experience many different emotions and thoughts when starting and running their own business. You may feel excitement, optimism, exhaustion, and even fear.

How you are going to live 20, 30, or 40 years from now is probably not top of mind. There are more interesting and pressing things to do. The primary goal is usually to grow the business and turn a big profit as soon as possible.

You are probably laser focused on promoting and providing your product or service to your target market. Or you may have financial statements to look at, budgeting issues to fix, and meetings to attend. Maybe you have to deal with vendors, employees, accountants, and others. All within the 24 hours available each day. Who has the time to think about setting up a retirement plan?.

The are so many different types of small business retirement plans, with rules and limits, and so on. Why bog yourself down with all that? You have more exciting things to do which will have a much greater impact on your immediate future.

While this may be true, at some point you do need to step back for a moment and address the future. Because for best results, you should address the future now as well. By spending a few minutes reading this article, you can gain a basic knowledge which can allow you to take action in a more confident and timely manner.

The Sooner You Start Saving The Better

Now granted, you do not need to create a retirement plan before the paint is dry on your shingle, so to speak. The first few years of a new business can be very lean. However, once you start making some money, it may be time to set aside some time to look into setting up a retirement plan suitable for your business. Putting some of your profits aside for retirement early on can be very advantageous.

It is better to put money aside when the going is good. There are several risks in waiting to save for retirement. For one, your business can falter. You don’t want to think about that today, but it is a possibility you have to consider and plan for. An accident, illness, or incapacitation can change things immediately. Technology can make your product or service obsolete, or your competitors can drive you out of business.

Besides, starting early will allow the funds in your retirement account to grow more by the time you retire. You will have more time to potentially ride out any market downturns or underperformance in your investments. Then maybe you won’t have to make those “catch-up” contributions after you reach age 50 in order to accumulate a sufficient “nest egg.” You can instead spend that money on other pressing expenses such as college tuition, or more desirable and discretionary ones such as vacations, gifting, or philanthropy.

Basic Knowledge on A Topic Can Help You To Communicate Better With A Professional

This article will give you answers to some of the most commonly asked questions about small business retirement plans. It will provide you with a quick and basic understanding of the topic, with some in-depth detail in certain areas.

Even though you will likely (and rightly so) call on professionals to create and administer your plan, it is always wise to have a general understanding of the topic. This way, you can have a more intelligent and insightful conversation with your professional.

You can better express to them exactly what you are looking for. Not to mention that you will have some idea of what your professional is talking about when trying to recommend the best course of action for you and your business.

So whether you are a new entrepreneur, or have been at it a while, you’ve obviously decided it’s time to start thinking about retirement planning through your small business. It is well worth your time to learn some more about this topic. After all, your future may depend on it!

Why should I set up a retirement plan for my business?

As a small business owner, it is generally a good idea to start thinking about saving for retirement sooner rather than later.  The government encourages saving for retirement by allowing your money to grow tax free, while also granting up-front tax deductions for contributions in most cases as well.  The earlier you start, the more time your funds have to compound and grow in a tax free manner.

If you have or plan on hiring employees, a retirement plan can be a good selling point.  It is an added benefit on top of whatever else your company may offer the prospective employee.

What types of small business retirement plans are available?

Although there are some more complicated and hybrid types of plan options, this article focuses on the most common and straightforward ones. These small business retirement plans do not require actuarial calculations, nondiscrimination testing, or other administratively burdensome tasks. The monetary cost of implementation and maintenance is also negligible.

This is not to say that more complicated small business retirement plans may not be right for you in your specific situation. However, we will not discuss them here since they are generally not ideal for most small business owners who operate alone or with a few employees.  The small business retirement plans addressed in this article consist of the following:

Simplified Employee Pension Plan (SEP)

Simplified Employee Pension Plan (SIMPLE)

Solo 401(k) & Roth Solo 401(k)

These small business retirement plans are relatively easy to set up and maintain, and are generally suitable for many sole proprietors or businesses with few employees.  You can implement them whether you operate your business as a sole proprietor (Schedule C on IRS Form 1040), partnership (IRS Form 1065), C corporation (IRS Form 1120), or an S corporation (IRS Form 1120S).

The number of employees you have or plan on having in your business may restrict the type of plan you are allowed to have.  SEP IRAs have no such limitations.  If you plan on having more than 100 employees, it is best to avoid the SIMPLE IRA from the outset.  However, this should not be an issue for most small business owners.  Finally, with a Solo 401(k), you cannot have any employees other than yourself and your spouse.

You Can Also Use Individual Retirement Plans

In addition to the plans listed above, small business owners can also use traditional and Roth Individual Retirement Accounts (IRAs) to save for retirement.  These plans can be used in conjunction with the small business retirement plans. They can allow entrepreneurs to save even more for retirement on a tax free basis.

Note: A Solo 401(k) is not to be confused with a traditional 401(k).  The latter allows you to have employees other than yourself and your spouse. However, it is also relatively more expensive and cumbersome to set up and maintain.  It requires nondiscrimination testing to ensure fairness to all employees.  A traditional 401(k) will not be discussed in this article.

Who can contribute to small business retirement plans?

There are two types of contributions.  It is important to distinguish between “employer” contributions and “employee elective deferral” contributions.  The company (employer) pays the former on behalf of you (as the owner) and your employees.  The latter is essentially a contribution by employees from the salary they would otherwise receive.  Employees are “deferring” receipt of their salary by putting it into a retirement plan.

Employer contributions are recorded as an expense of the company (i.e., pension expense). Employee elective deferrals are part of the salary expense recorded on the employer’s books. They actually represent part of an employee’s salary which that employee has elected to contribute to their account in the retirement plan.  By deferring salary, the employee also defers income tax on the amount of salary deferred (by contributing it into the retirement plan).  Tax is paid when the funds are ultimately distributed from the retirement plan.

SEP Contributions

With a SEP plan, only the employer contributes to the plan.  Employee elective deferrals are not an option with a SEP plan.  So you can make SEP contributions to the plan for yourself and your employees.  Now because a SEP plan is a type of traditional IRA, some plans may allow you (and your employees) to make your traditional IRA contributions into the same account instead of opening a new traditional IRA account.

SIMPLE Contributions

In a SIMPLE plan, both the employer and employee can make SIMPLE plan contributions to their account.  Employer contributions (mandatory) as well as employee elective deferrals (discretionary) are both allowed.

Solo 401(K) Contributions

Finally, the Solo 401(K) also allows both employee (elective deferrals) and employer contributions. All contributions to such a plan are discretionary since there will be no other employees other than yourself and your spouse (if applicable).

Can I contribute to multiple retirement plans in the same year?

It is possible to make contributions to your small business plan as well as to a Roth or traditional IRA in the same year.

Additionally, these days, it is very common for entrepreneurs to start a side business while also working for another employer.  In this case, it is possible to participate in your employer’s 401K plan (for example) and also make contributions to your own small business retirement plan.

So in one year you can participate in your own employer’s 401(k), your own traditional or Roth IRA, and your own business’s retirement plan.  That’s three retirement plans in one year!

This all sounds great as far as being able to potentially put some serious funds to work for yourself in saving for retirement.  However, the following two points should be considered.

First, your income, budget and living expenses often dictate how much you will be able to contribute to these plans.  Especially in this tough economy, all too frequently business owners (and individuals in general) save very little or nothing for retirement. Often this is because many cannot afford it.

However, you really cannot afford to forego contributing as much as your budget allows because starting early really is a significant advantage.  The power of compounding is tremendous!  If necessary, cut back on some expenses and redo your budget so that you can start putting something aside for retirement.

You Need Earned Income To Contribute to a Retirement Plan

You will notice in this article that contributions to small business retirement plans are generally based on your earned income. So in order to make contributions for a given tax year, you must have income. Your employees will have income from the salary you pay them.

If you are a sole proprietor (Schedule C of form 1040), or a partner in a partnership, your business must have net income if you want to make retirement plan contributions to your own account. If you are a shareholder in a corporation, your income will consist of any wages you pay to yourself (which will be reported on Form W-2 after year end).

Please also note that a contribution to a retirement plan is not always necessarily deductible. Particularly when it comes to traditional and Roth IRAs.  A distinction must be made between contributions to retirement plans and tax deductible contributions to retirement plans. Both have limitations as discussed below.

What is the maximum amount I can contribute to the various small business retirement plans?

Note: The limits discussed here and in the rest of this article apply to the 2017 tax year.

This a very important question in that the more you are able to contribute, the faster you can accumulate a sufficient nest egg for retirement.  However, it is also imperative not to violate the contribution limitations discussed below in order to avoid penalties.

Note: Sole proprietors and partners in a partnership do not receive wages.  Their share of the net income of the business generally represents their self employment income used to calculate contribution limits.

Sole proprietors report their self employment income on Schedule C of IRS Form 1040.  Partners receive a Schedule K-1 from the partnership which reports their share of partnership income.

Owners or shareholders of corporations on the other hand, generally receive wages, which are reported on IRS Form W-2.  S corporation shareholders may receive a K-1 as well, but the income to be used for calculating pension contributions is their wages, which are reported on Form W-2.

Employer Contributions to SEP and 401(k) Plans

Employer contributions to SEP and Solo 401(k) accounts of employees cannot exceed the LESSER of  1) 25% of compensation or 2) $54,000.  The maximum compensation to be used for the calculation is $270,000.

You can always contribute a lesser amount, but this is the maximum.

If you are self employed (Schedule C or a partner in a partnership), you must use a special calculation to determine the contribution limits to your own account.  Your compensation as a self employed (non W-2) individual is computed by subtracting ½ of your self employment tax from net income.  You then apply 20% to this figure (up to $270,000 maximum) to determine your maximum allowable contribution to your own plan account.

Employer Contributions to SIMPLE Plans

Employer contributions for SIMPLE plans are a bit more complicated.  Unlike with SEP and Solo 401(k) plans, employer contributions to SIMPLE plans are mandatory.  Employers have two options.

You can contribute 2% of each eligible employee’s compensation regardless of how much the employee contributed or “deferred” into their own account.  The compensation limit you must use for this calculation is $270,000.  So the maximum contribution will be $5,400 under this option.

Alternatively, you can match the employee’s contribution on a dollar for dollar basis up to 3% of the employee’s compensation. The 3% limit may be reduced to as low as 1% for up to 2 out of a 5 year period.  There is no compensation limit for the 3% calculation, but the maximum employer contribution with this option is whatever the limit is for employee contributions ($12,500 or $15,500 if over 50 years old).

Employer Contribution Limits Are Determined On A Per Employer Basis

Employer contribution limits apply on a per employer basis.  So, for example, you can max out at the above limits with your own company’s retirement plan, and then also potentially receive employer contributions into a 401(k) or other plan from your employer if you have another job.

Employee Contributions

Employee elective deferrals are available for SIMPLE and Solo 401(k) accounts, but not for SEP accounts.

With SIMPLE accounts, employees may elect to defer up to $12,500 of their salary into the plan in addition to whatever the employer contributes.  Those over 50 may defer an additional $3,000 in “catch-up” contributions.

With a Solo 401(k) plan, employees may defer up to $18,000 of their salary into their plan account. Those over 50 can defer an additional $6,000 of “catch-up” contributions into their account.

The employee deferral limits apply on an aggregate basis to all plans (which allow deferrals) in which an employee participates.  The maximum you can defer for the year across all the plans in which you participate  as an employee is $18,000, $24,000 if over 50 years old.  And if one of those plans is a SIMPLE, the total limit for an employee is the same. But the limit for that particular plan is lower as indicated above.

So let’s say you are under 50 years old and you participate in your own company’s SIMPLE plan, in which you defer $12,500 for yourself.  You also happen to have another job elsewhere and participate in your employer’s 401(k) plan. You would be able to defer another $5,500 of your wages into that plan for a total annual deferral of $18,000 for the year.

Total Contribution Limit

There is an overall limit on the total annual contributions to all of your accounts in plans maintained by one company (and any related company).  The overall limit is the “employer contribution” limit plus another $6,000 elective deferral if you are over 50 years old.

So the maximum you can contribute to a solo 401(k) plan for your business into your own account for 2017 is $54,000 (employer contributions and elective deferrals).  It is $60,000 if you are over 50.

The employer and overall contribution limits are per employer.  However, note that the employee deferral limit is per employee (across all employers).

So if you have your own company and also have a regular job, you can potentially contribute more than the overall “employer” limit.  However, the employee deferral limit still applies.

For example, let’s say you are under 50 years old, you own your own company, and you also work for an unrelated company.  You can contribute up to $54,000 (employer contributions) into your own retirement plan, and also up to $18,000 (elective employee deferrals) into the plan at your other job.  On top of that, you may get employer contributions from your other job as well since this is a different unrelated employer.

Note: Keep in mind that in order to max out on these limits, you must have the requisite net income. To get the employer max out, for example, you need $270,000 of net income in 2017. Regardless, you do not have to max out. You can contribute the maximum for your own income level, or something less.

Contributions to IRAs

The annual limit in 2017 for the amount you can contribute to all of your Traditional and Roth IRAs is $5,500.  If you are 50 or older, you can contribute an additional $1,000, for a total of $6,500.

These are the contribution limits assuming your earned income for the year is greater than these amounts.  If your earned income is less than these amounts, then that is your contribution limit.  You can use your spouse’s earned income for this purpose if you are married and filing a joint tax return.

The contribution limits for Roth IRAs are reduced if your Adjusted Gross Income (AGI) is above certain thresholds.

For 2017, the Roth IRA contribution limit is unaffected as long as your AGI is under $118,000 if filing single, and under $186,000 if married filing jointly (MFJ).  Once you reach these AGI levels, the limit begins to phase out.  Once your AGI exceeds $133,000 (single) and $196,000 (MFJ), you cannot contribute to a Roth IRA.

Note: There is a loophole in the law which allows you to contribute to a Roth IRA regardless of your income.  You can make a non-deductible contribution to a Traditional IRA (up to the limit allowed) and then “roll-it-over” into a Roth IRA.  There will not be a tax on the “rollover” since you did not take a deduction for the Traditional IRA contribution.

How much of my small business retirement plan contributions can I deduct from my taxes?

Now we’re getting down to business!  Deductions that can reduce your taxable income and tax liability for the current year!

Employer contributions

“Employer contributions” that you make on behalf of your employees that are within the contribution limits discussed above are deductible in reducing the taxable income of your business.

If you are a Sole Proprietor, the pension deduction will appear on Schedule C of your IRS Form 1040.  If you are a shareholder in an S or C corporation, the deduction will appear on IRS Forms 1120S or 1120 respectively.  As a partner in a partnership, the deduction will be reflected on Form 1065.

“Employer contributions” you make for yourself are ultimately deducted on page 1 of IRS Form 1040 unless you are a shareholder in a corporation.  They are deducted directly on page 1 of Form 1040 when you are a sole proprietor.  If you are a partner in a partnership, you will receive a Form K-1 which will report your income and other tax attributes.  Among these other tax attributes will be the “employer contributions” made into your own plan account.  You will use the Form K-1 received from your partnership tax return to report the contribution deductions. You will report them on page 1 of your personal tax return (Form 1040).

If you are a shareholder in a corporation, you are considered an employee.  As such, the “employer contribution” made for yourself is deducted on the corporate tax return.

Employee contributions

“Employee contributions” or “elective deferrals” of your employees are already deducted as part of your employees’ salary expense.  So there is no additional deduction here.  These contributions are just part of the employee salary which the employee has “elected” to contribute to their retirement plan account.  Your employees’ year end Form W-2 will reflect these contributions by reducing their taxable wages on the form.

To the extent you are also an employee of your company, get paid a salary, and receive a year end form W-2, your “elective deferrals” are treated the same way.  This is generally the case if you operate an S corporation or a C corporation.

However, if you operate as a Sole Proprietor (Schedule C) or are a partner in a partnership (Form 1065), you do not receive a salary or a W-2.  As such, you deduct elective deferrals you make for your own account on page 1 of Form 1040.

Traditional IRAs

If you are not covered by any other retirement plans at work or at your own business, contributions to traditional IRAs are deductible up to the contribution limits discussed above. There are no income limitations or phaseouts if the IRA is your only retirement plan.

However, if you are covered by a retirement plan at work or at your own business,  and your income is above certain threshold levels, your deductible contribution amount may be reduced.

The income thresholds for 2017 are as follows:

If your filing status is single or head of household and you are covered under a retirement plan at work (or at your own company), the amount of your IRA contribution which you can deduct will start phasing out at adjusted gross income (AGI) of $62,000, and is completely phased out once AGI reaches $72,000.

For married taxpayers filing jointly, and covered under a plan at work (or at their own business), the phaseout begins at $99,000 of AGI and there is no deduction allowed once income surpasses $119,000. If you are married and only your spouse is covered by a retirement plan at work, then the phaseout begins at AGI of $186,000, and there is no deduction allowed once AGI reaches $196,000.

However, as indicated above,  it may still make sense to contribute to a traditional IRA even if no deduction is allowed.   Funds will still grow on a deferred tax free basis and also may be converted to a Roth IRA.

Roth IRAs and Roth 401(k)s

The main difference between “Roth” accounts compared to traditional retirement plans is that you are not allowed a tax deduction up front for the year you make your contribution.  However, unlike traditional plans, you also generally do not pay tax when you take the money out at retirement.

If I leave my employer, can I transfer my 401K to an IRA or small business retirement account?

It is not uncommon these days for an employee at a large firm to leave their job in order to satisfy their entrepreneurial spirit.  However, what do you do with that 401(K) plan you have with your employer?

Well, you can use a “rollover” to transfer your 401(k) from your employer to your own retirement account. You can transfer it tax free to a Traditional IRA. Or you can move it into one of the (non-Roth) small business retirement plans discussed above. There is generally no tax on this transfer as long as you follow some simple rules.

The ideal way to make the transfer is called a “trustee to trustee” or direct rollover.  This way you never receive the funds yourself outside of the plan account, which can otherwise result in a taxable transaction.

If you do inadvertently pay the money out to yourself for whatever reason, you may still avoid tax if you deposit the funds into your retirement plan within 60 days.  However, if taxes are withheld upon a distribution to you personally, you will have to come up with the extra funds to make a 100% rollover of the distribution into your new retirement account.  You then may be able to get a refund of the withheld tax when you file your income tax return.

Note: In order to do a rollover into a SIMPLE IRA plan, the plan must first have been open for at least 2 years before you can do the rollover.

Also note that if you do a rollover of a traditional type of plan such as a 401(k) to a Roth type of plan, you will have to pay a tax on the amount converted.

How do I open up and maintain an IRA or small business retirement account?

The easiest way to set up one of these small business retirement plans or IRAs is to consult a professional or financial institution. This can be a bank, brokerage house, mutual fund provider, or insurance company.  These institutions will generally provide all the required forms and assistance to help you establish and maintain the plan. Examples include Fidelity, Vanguard, and TD Ameritrade.

These financial institutions generally also provide required custodial and recordkeeping services. They handle contributions, plan investments, and distributions.

What are the filing and notification requirements for the various small business retirement plans?

SEP and SIMPLE plans do not require the filing of form 5500 (Annual Return/Report of Employee Benefit Plan).  A form 5500 must be filed for a Solo 401(k) plan once plan assets reach $250,000.

You must also provide information to your employees about the plan.  They must be notified (if they are eligible to participate) about the plan’s benefits and requirements.  A summary plan description (SPD) is usually created with the plan document and is the primary vehicle in informing employees how the plan works.

Am I required to make retirement contributions for all of my employees?

When you make a contribution to your own SEP account, you must also contribute the same percentage to the SEP accounts of all your eligible employees.  However, you are not required to contribute every year.

Employees are eligible to participate in your SEP plan if they meet certain criteria as follows:

  • at least age 21
  • have worked at your company in 3 out of the last 5 calendar years
  • earned at least $600 in compensation for the year

You can make the criteria less strict, but not more so. Also, you must apply the criteria equally to all employees including yourself as the owner. However, you can set up the plan so that you can participate immediately, and then amend it to include more restrictive criteria for future employees.

With a SIMPLE plan, you (as the employer) must contribute to the plan every year.  You have two options as discussed above.  Generally, you can contribute 2% of the employee’s compensation. Or you can match their contribution (if they make one) up to 3% of their compensation.

In order to participate in a SIMPLE plan, an employee, including the owner, must meet certain criteria:

  • have earned income of at least $5,000 during any two years before the current calendar year AND
  • expects to earn at least $5,000 during the current calendar year

As with the SEP plan, you can make the criteria less restrictive, but not more so.

The only eligible employees with a 401(k) are yourself and your spouse.  As such, contributions to such plans are optional.

When can I take money out of my retirement accounts without incurring a penalty?

You are generally allowed to make withdrawals from traditional plans after attaining age 59 ½ without incurring the 10% penalty.  With SIMPLE IRAs, the penalty is 25% if the withdrawal is made within the first 2 years you participate in the plan.

So that is the general rule.  You really should wait until at least age 59 ½ before withdrawing any of these funds anyway.  However, if you find yourself in dire financial straits, there are some exceptions to the rule.

Exceptions to Early Withdrawal Penalty

Following is a select list of common distributions which would not incur the 10% additional tax even if received before age 59 ½ :

Education

The distributions must not be more than your qualified higher education expenses. The education must be for you, your spouse, or the children or grandchildren of you or your spouse.  Qualified expenses include tuition, fees, books, supplies, and equipment required for enrollment at an eligible educational institution.  If the individual is at least a half-time student, room and board expenses qualify as well. The tax law does not allow this exception for a Solo 401(k).

Home Purchase or Construction

The distributions must be used to buy, build, or rebuild a first home.  The limit for this exception is $10,000 (lifetime limit per taxpayer).  The funds must be used to pay qualified acquisition costs within the 120th day after the distribution is received.  The homebuyer may be yourself, your spouse, or your or your spouse’s child, grandchild, parent or other ancestor. If both you and your spouse are first -time homebuyers, you each qualify for a maximum exclusion of $10,000.  First-time homebuyer for this purpose is anyone who did not have a present interest in a main home during the 2-year period ending on the acquisition date of the new home. This exception is  not allowed for a Solo 401(k).

Medical Expenses

The distributions must not be more than the amount of unreimbursed medical expenses which exceed the AGI threshold (10%).  However, you do not have to itemize deductions and file Schedule A to take advantage of this exception.

Death Distribution

The plan must pay these distributions to a beneficiary (or to the estate) of a deceased IRA owner. However, you may inherit a traditional IRA from your deceased spouse and elect to treat it as your own. In such a case, any distribution you later receive before age 59 1/2 may be subject to the 10% additional tax.

Annuity Option

You must have chosen to receive distributions in the form of an annuity.  An annuity in this case means a series of substantially equal payments you will receive (at least annually) over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary.  You must use an IRS approved distribution method. You can stop or change these payments upon reaching age 59 ½.

Medical Insurance

The distributions must not be more than the cost of your medical insurance due to a period of unemployment.  To qualify, you must have lost your job, received unemployment compensation (UC) for 12 consecutive weeks, you received the distributions during the year you received the UC or the following year, and you received the distributions no later than 60 days after you have been reemployed.  The tax law does not allow this exception for a Solo 401(k).

Disability

You must be totally and permanently disabled (you cannot do any substantial gainful activity because of your physical or mental condition).  A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.

IRS Levy

The distributions must be due to an IRS levy of the qualified plan.

Reservist

The distribution must be a qualified reservist distribution.  You must have been called to active duty after September 11, 2001 for a period of more than 179 days (or for an indefinite period), and the distribution must have been made no earlier than the date of the order or call to active duty and no later than the close of the active duty period.

Separation from Service

The plan administrator must make distributions to you after you separated from service with your employer. The separation must have occurred in or after the year you turned age 55. This exception applies to the Solo 401(k) plan, but not to SEP, SIMPLE, and other IRA plan types.

Some of the Exceptions Do Not Apply to 401(k) Plans

Also note that the education, home, and medical insurance exceptions above apply only to SEP, SIMPLE, and other IRA plans. But they do not apply to Solo 401(k) plans. However, Solo 401(k) plans may allow for loans. So you can potentially use a loan to pay these types of expenses without incurring penalties.

Keep in mind that these exceptions allow you to avoid the penalty. But you still generally have to pay income tax on distributions unless the plan is a “Roth.”

You Can Borrow from Your 401(k) Plan

The maximum you can borrow from your 401(k) is the lesser of 1) half of your account balance or 2) $50,000. Some plans may include an exception that if option 1 is less than $10,000, you can borrow up to $10,000.

You must repay the loan within five years and must make payments at least quarterly. If you use the loan to purchase a primary residence, then the 5 year requirement does not apply.

SEP, SIMPLE, and other IRA type plans do not allow participants loans.

Which of the available small business retirement plans is right for me?

The plan you ultimately select will generally depend on your goals and other factors. You must look at the features of each of the small business retirement plans discussed above. This way you can see which one may be right for you and your business.

Employees

If you have or plan on hiring employees other than yourself or your spouse, you cannot create a Solo 401(k). So you may wish to implement a SEP or SIMPLE retirement plan.  At the same time, if you have over 100 employees, you may wish to create a SEP plan for your business.  However, most small business owners do not come close to the 100 employee limit.

Contribution Flexibility

Contributions to SEP and Solo 401(k) plans are discretionary on an annual basis.  You do not have to contribute every year. This is particularly helpful if your business is cyclical and does not generate consistently sufficient profits.  However, with a SIMPLE plan, you as the employer must make contributions on an annual basis.  So if you desire flexibility in this sense, you may want to avoid a SIMPLE plan.

Maximizing Amount of Retirement Savings

The Solo 401(k) will generally allow you to save the most in a given year. That is assuming your budget allows for the maximum contribution.  The reason being that not only can you contribute the employer portion for yourself, but as an employee (even a Schedule C sole proprietor), you can also make an elective deferral as well.

The overall limit is the same for SEP plans once you reach the maximum compensation limit.  But for lower compensation levels, you can generally contribute more to the Solo 401(k) since it also allows for employee deferrals.

Employee Deferral Option

SIMPLE plans, unlike SEP plans, allow employees to make deferred salary contributions.  The Solo 401(k) allows this feature as well, but the only employees allowed are yourself and your spouse. So you may have employees and you want to give them the ability to defer part of their salary for retirement. The SIMPLE plan may be the way to go. Although you would still have to consider the mandatory employer contribution.

What is the deadline for setting up and contributing to a retirement plan for 2017?

There are generally two deadlines you must be cognizant of when setting up a retirement plan for your small business.  One is the date by which you must have set up the plan.  The other is the date by which you must make contributions for the year in question.

You must set up a SEP plan by the due date of the employer’s tax return (including extensions). You can set up a solo 401(k) plan by the end of the employer’s tax year, which is generally December 31. SIMPLE plans must be set up by October 1st. If you created your business after this date and wish to have a SIMPLE plan for the current tax year, set up the plan as soon as possible.

The deadline for making SEP contributions is the employer’s tax return due date (including extensions).

With Solo 401(k) plans, the deadline for all contributions is generally the due date of the business tax return including extensions.  However, you may receive wages as the owner/employee of a corporation, for example. In such a case, the “employee elective deferral” portion must be indicated on your last paycheck before year end (and reflected on that tax year’s Form W-2).

For SIMPLE plans, you must deposit employee salary reduction contributions into the plan account within 30 days after the end of the month the related salary is received.  SIMPLE plan employer contributions must be deposited by the due date of the business tax return including extensions. Remember that a sole proprietor does not file a separate business tax return. So the deadline is the filing due date of his/her personal income tax return.

Conclusion

So now you are hopefully more informed and educated about the most common and straightforward types of small business retirement plans. Many business owners across the country utilize such plans to save for retirement. Based on your situation, you may even have an idea which one you prefer.

Maybe you have an inconsistent business in terms of profits, and do not wish to have mandatory contributions every year. Alternatively you may have a highly profitable business and want to save as much as possible. Or the fact that you have employees may influence and narrow down your decision.

Whatever the case, you have knowledge which you likely did not have a few minutes ago. This knowledge can help you and any employees you may have in a meaningful way. It can prepare you for your golden years.

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