Small Business Shouldn’t Mean Small Retirement Plan

Small businesses have as much a need for retirement plans as larger ones.

Small business owners have many challenges, and for them prioritizing what to address and when is probably the most difficult part. Many owners wear several different hats, but all too often the hat of “retirement plan administrator” goes unworn. It shouldn’t.

Just because you are a small business does not mean there aren’t options for offering a retirement plan to both yourself and your employees (if you have any). Contributing to an IRA (Individual Retirement Account) on your own each year is certainly a good idea, but the current limit of $5,500 per year (for those under age 50) is probably not enough to satisfy a long-term retirement plan.

The IRS provides several options for the small or solo business owner, but the two most popular and straightforward are the SEP IRA and the SIMPLE IRA. Both have much higher contribution limits than an IRA and have tax advantages. Most importantly, both have little to no start-up or ongoing costs and are simple (no pun intended!) to set up.

The SEP IRA – Simplified Employee Pension Plan (the IRS loves acronyms) – allows an employer to make tax deductible contributions directly to an IRA in the name of the employee. For 2017, the contribution limits are 25 percent of the employee’s compensation, or $54,000. These types of plans are often used by solo business owners such as real estate agents and consultants. The business owner and the employee are one and the same, but the SEP IRA structure allows for a much larger contribution to an IRA, while providing a significant tax deduction.

The SIMPLE IRA – Savings Incentive Match Plan for Employees – is set up much like a 401(k) plan, which most of us are familiar with. Each employee is allowed to defer (contribute) a portion of his or her salary each pay period. And, the employer usually offers a matching contribution of up to three percent of the employee’s salary. The employee must contribute at least that much on his or her own in order to receive the matching contribution. Currently, an employee under the age of 50 may contribute up to $12,500 per year, with an additional $5,000 allowable for those over age 50.

Starting a retirement plan for you and your employees should be a high priority. Not only will the plan help you and your staff save for the future, it might also help retain hard-to-find high quality employees. So, don’t be afraid to put on your “retirement plan administrator” hat.

Nathan Gilbert
About Nathan Gilbert 7 Articles
Nathan Gilbert is an Investment Advisor and Managing Partner with Meridian Financial Partners in Warrenton, Virginia. Meridian is an independent, fee-only investment advisory firm providing financial planning and investment management. Mr. Gilbert was born and raised in the area and currently resides in Haymarket with his wife and three children.

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