Small business owners have several options for choosing the right retirement plan. When deciding which plan is best, factors you should consider are how many employees you have and how are they paid? How much do you want to contribute to the plan for yourself or your partners, as business owners, as well as for your employees? Do you want to use the plan to attract future employees or for its tax advantages? Three retirement plans to consider are a SEP IRA, Simple IRA, and 401(k).
A SEP IRA allows an employer to contribute up to 25% of their net earnings or W-2 income, not to exceed $53,000. Contributions to the plan are at their discretion so an owner can decide each year if contributions will be made. If an employer makes contributions for themselves in a particular year, they typically contribute the same percentage for all eligible employees. Unlike a 401(k) plan, there is no special tax return required for this type of retirement plan.
A Simple IRA allows for both employee elective deferrals and employer contributions. Employees may make pre-tax contributions to the plan up to 100% of their W-2 compensation, although it is limited to $12,500 in 2016 ($15,500 if 50 or over). Sponsors of these plans are required to make elective or non-elective matching contributions. Elective matching contributions are a dollar for dollar match up to 3% of an employee’s compensation. Alternatively, an employer may choose to make “non-elective” contributions for all participants (including themselves), in which the employer contributes 2% regardless of how much the employee deferred.
A 401(k) (or Solo 401(k)) allows employees to make pre-tax elective deferral contributions up to $18,000 in 2016 ($24,000 if 50 or over) and employers make either matching or non-elective contributions to the plan for all eligible employees. Employers also have the option of adding a profit sharing component to the plan in which they share a portion of profit by contributing an additional percentage of salary to every employee’s account. The maximum total contribution counting both employee and employer contributions is limited to $53,000 in 2016 ($59,000 if 50 or over). These plans offer larger tax deductions and allow for more flexibility in their design, which makes them a very popular option.
To help you decide which plan is best for you, call 303-639-5100 to schedule a complimentary consultation with Sharkey, Howes & Javer.
