As a small business owner, obtaining a retirement plan for you and your employees isn’t as easy as it may seem. There are several different types, and some of them can be quite complicated and expensive. With this breakdown, you'll be able to cut through the clutter of choosing an employee retirement plan.
SEP IRA
A Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) is a variation of the common IRA used around the United States. This type of plan is perfect for self-employed individuals or small business owners looking for a quality retirement plan for their employees.
The advantages of a SEP IRA are that it’s easy to set up and maintain, as well as allowing flexible annual funding requirements. Additionally, there is a wide range of investment choices for small businesses owners. Finally, there is no initial setup fee or annual maintenance fee for SEP IRAs. The contribution limit for this plan is set at 25% or $54,000 for 2017.
SIMPLE IRA
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is designed specifically for small business owners that have 100 or fewer employees. Like the SEP IRA, it’s easy to maintain but differs because most of the funding is from employee contributions rather than funded by the employer. With a SIMPLE IRA, small business owners are required to make contributions of at least 1–3%.
The advantages of a SIMPLE IRA are that it offers a salary deferral plan with less administration and allows for electronic funding with customized contribution allocation for each participant. It also has a broad range of investment choices, like the SEP IRA. However, these do have annual and plan fees which vary based on the investor you choose. The contribution limit for SIMPLE IRAs is set at $12,500 per year.
Defined-Benefit
Defined-Benefit plans are becoming less common with big businesses, but they are still a perfect way for small business owners to provide retirement plans for their employees. Defined-Benefit plans, or pension plans, use a formula to determine how much money will be received by the employee after retirement.
Defined-Benefit plans are often one of the most sought after retirement options for employees but can be dangerous for small business owners. If the overall pension fund performs poorly, employers may have to find more money to top-off the pension plan. However, defined-benefit plans allow small business owners to contribute a lot of money, can be combined with other options, and reduce tax liability.
401k
One of the most popular types of retirement accounts is a 401k. They work best for companies that have over 20 employees or companies that prize flexibility. 401k accounts are funded by employee deferrals and employer contributions. In addition to having a wide range of mutual fund options, this type of retirement plan also has plan administrative services, investment management, and education programs.
The costs of a 401k vary based on which company you choose to handle your accounts. For 2017, the pension plan limitations remained unchanged, meaning an employee can contribute up to $18,000 for their account. Small business owners often match employee contributions up to a certain percentage of the employee’s contribution, but there is no minimum contribution amount.
