Do You Feel Confident About Your Retirement Plan?

Weeding through the details of all the different retirement account options can get confusing, but no matter your age, the time to start saving for retirement is now. Learn more about six common types of plans.

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The website www.manta.com conducted a survey of 1,960 small-business owners in 2017, and 34 percent of those surveyed said they don’t have a retirement savings plan.

Of those respondents who do not have retirement savings, 37 percent said they don’t make enough profit to save for retirement and 21 percent said they used their previous retirement savings to invest in their business. Eighteen percent of those without a plan said their business was their retirement, meaning they hope proceeds from selling the business will be enough to retire on. That’s what financial experts call putting all of your eggs in one basket, and it’s risky because if the business fails, your retirement savings vanish.

In that same survey, 12 percent of those without a retirement savings plan said they didn’t see any need to save for retirement, and another 12 percent said they don’t have any plans to retire. People in those two groups hope to have a huge inheritance coming from a long lost relative or they plan to work themselves to death.

If you are in any of these no-plan scenarios, it might be time to learn your letters and numbers. No, not the Sesame Street ones, but rather the confusing stew of letter and number combinations that make up the variety of retirement plan options for small-business owners.

If you do have a retirement savings plan for yourself, you may be interested in starting plans for your employees as well. It’s a benefit that can set you apart from competing employers and help you keep good employees. A job offer that includes a retirement plan is more attractive than one from a company without that benefit.

Likewise, it makes more sense for an employee to stay with a company until he or she is vested than to quit. For example, employees may not be fully vested for five years so leaving after two or three years would mean only a percentage of the money contributed to a retirement account by the company is theirs.

Here are some features of the most common retirement savings plan options:

SEP IRA

The simplified employee pension, or SEP, IRA is available to companies filing taxes as sole proprietors, partnerships, C corporations, and S corporations and can be used by self-employed individuals or small-business owners, including those with employees. A SEP is easy to set up and maintain, and there are typically low or no setup fees or annual charges.

A SEP IRA can cover employees, but it is completely employer funded — employees do not make contributions. For 2018, an employer can contribute up to 25 percent of an employee’s compensation up to $55,000. For business owners with employees, it’s important to note that while you are not required to make a contribution every year, you must contribute the same percentage for employees that you contribute for yourself.

As for access to the funds, withdrawals are allowed at any time, but a 10 percent penalty may apply before the plan owner reaches 59 1/2.

SIMPLE IRA

A savings incentive match plan, or SIMPLE, IRA is available for self-employed individuals and also allows businesses with 100 or fewer employees to establish an account for employees. The SIMPLE IRA is available for companies filing taxes as sole proprietors, partnerships, C corporations or S corporations.

Employees are allowed to make salary-deferral contributions of up to 100 percent of compensation up to $12,500 in 2018. Employees over age 50 can also make a $3,000 catch-up contribution. The employer can either match employee contributions up to 3 percent of compensation or contribute 2 percent of compensation if the employee does not contribute. The employer contribution limit is $5,500 for 2018 in either scenario.

Fees for this type of plan vary by administrator, but are usually pretty low at about $25 per participant or a few hundred dollars per plan. Money may be withdrawn at any time with a 10 percent penalty before age 59 1/2. If a withdrawal is taken within the first two years one participates in the plan, however, that penalty is 25 percent.

Self-employed or solo 401(k)

This type of plan is available for self-employed individuals or business owners with no employees other than a spouse. It is available to sole proprietors, partnerships, C corporations or S corporations. It is a good choice for a self-employed individual who needs to play catch-up when it comes to retirement savings because, depending on your age and income, it allows a person to save as much as $60,000 a year.

Some people like that it can be self-directed, allowing the account holder to allocate money to the stocks, bonds or other investments of their choosing. Another feature some business owners like is that they can borrow against a solo 401(k).

Withdrawals cannot be taken from the plan until age 59 1/2, except in cases of disability or plan termination.

Simple 401(k)

For companies with fewer than 100 employees, the Simple 401(k) is sometimes preferred because it’s easier to administer than a standard 401(k). Employees can elect to contribute, and the employer is obligated to make a matching contribution. The employer must file a form 5500 but does not have to perform the nondiscrimination testing required by the IRS with a regular 401(k).

The simple 401(k) is not the best type of plan to offer if your motivation is employee retention, however, because this type of account vests immediately.

401(k)

The 401(k) most people are familiar with is most appropriate for companies with 20 or more employees. Startup and maintenance fees vary by plan. It is funded by employee deferrals and employer contributions. Employers may make matching contributions up to 25 percent of an employee’s compensation up to a total maximum of $55,000. Total employer and employee contributions cannot exceed $55,000 annually, and the IRS conducts nondiscrimination tests to make sure plans do not favor highly compensated employees. Early hardship withdrawals may be available, but penalties usually apply before age 59 1/2.

ROTH IRA

Taxes are paid on money before it goes into a ROTH. It then grows tax-free and can be withdrawn tax-free when the account owner reaches 70 1/2.

An advantage of the ROTH IRA is that if you meet IRS income restrictions, you can contribute to your company’s SEP or SIMPLE IRA, as well as a ROTH. That gives you one tax advantage now and one later. Eligibility for a ROTH is based on modified adjusted gross income or MAGI. For single filers in 2018, if your MAGI is higher than $120,000, your contribution limit is reduced. It is eliminated completely at $135,000. For married taxpayers who file jointly, contributions begin decreasing when income hits $186,000 and are phased out completely at $199,000.

New Tax Laws

One of the incentives for investing in a retirement savings plan besides having a nest egg when you retire is that there are tax benefits. The new federal tax laws that went into effect this year do not change retirement savings incentives. While there was talk of rule changes, they did not end up being part of the final tax package passed by Congress and signed by the president. Talk to your accountant or financial planner for details on how to set up a retirement savings plan and how contributions will affect your 2018 tax picture.



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