Selecting a retirement account for your small business is a key decision that impacts both you and your employees.
With various choices available, it’s important to consider factors such as expenses, employee turnover, and contributions. This brief guide is designed to help you navigate different considerations when choosing a retirement plan that aligns with your business. A financial professional can provide guidance as you review the pros and cons of the different choices.
CHOICE 1: Consider Your Retirement Account Options
SEP
Simplified Employee Pension Plan
This is an employer-funded retirement account where contributions are made to separate IRAs for eligible employees.
SIMPLE
Savings Incentive Match Plan for Employees of Small Employers
This plan blends employee and employer contributions. Employers may match employee contributions or contribute a fixed percentage of each eligible employee’s compensation.
401(k)
This account is primarily funded by the employee, with the choice of additional employer contributions, including matching contributions.
CHOICE 2: Help Mange High Turnover
SEP-IRA
This is an employer-funded retirement account where contributions are made to separate IRAs for eligible employees.
SIMPLE IRA
This plan covers employees who have earned at least $5,000 in any prior two years and are reasonably expected to earn $5,000 in the current year.
401(k) & Defined Benefit Plan
This plan covers all employees who are at least 21 years old and is based on specific hours worked criteria.
CHOICE 3: Maximize contributions for yourself & your spouse
SEP-IRA & 401(k)
These plans offer higher contribution maximums than the SIMPLE IRA.
Defined Benefit Plan
This plan is suitable for business owners starting late, and it provides even higher allowable contributions.
CHOICE 4: Prioritize ease of set-up while managing administration fees
SEP-IRA & SIMPLE IRA
Straightforward to establish and maintain.
401(k)
This can be more complex, but using Safe Harbor 401(k) can simplify testing requirements.
Defined Benefit Plan
This is the most complicated and expensive retirement option to establish and maintain.
A financial professional may be able to help. They can either provide some general guidance regarding what retirement strategy best fits your business, or they can access research material that will help you better understand the available choices.
Like a traditional IRA, withdrawals from a SEP-IRA and SIMPLE IRAs are taxed as ordinary income and, if taken before age 59(1/2), may be subject to a 10% federal income tax penalty. In most circumstances, once you reach age 73, you must begin taking the required minimum distributions.
In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plans in the year you turn 73. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59(1/2), may be subject to a 10% federal income tax penalty.
