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Retirement Plans for the Small Business Owner and Their Employees

Brice Carter, CFP®, CIMA®, ChFC® financial strategies group inc. michiganBusiness owners have a great deal of responsibilities to contend with on a day-to-day basis. As a business owner myself, I can understand and appreciate the sometimes overwhelming list of tasks that need to be done. Among that list, usually somewhere near the bottom, is the process of setting up a retirement plan for yourself and your employees. Although setting up a plan does involve some work on the part of business owners, it does not necessarily need to be a time consuming or expensive proposition. Below are three retirement options employers could consider implementing depending upon what they are hoping to accomplish.

1. Payroll Deduction IRA

This is a very straightforward and inexpensive plan. A payroll deduction IRA requires no financial commitment from the business owner and, once established, requires very little work on the part of the payroll department. This plan simply allows employees to open an IRA or Roth IRA with a vendor that the company establishes a payroll relationship with. Once established, employees can have contributions withheld from their paychecks and directly deposited into their IRA or Roth IRA. The limit on contributions to a Traditional or Roth IRA is $5,500 a year. However, employees over the age of 50 can contribute an extra “catch up” contribution of $1,000 a year. This type of plan can be a great option for small businesses looking to offer something for employees in which they can save for retirement without the business having to make a financial commitment.

2. Simple IRA

The Simple IRA is very similar to a payroll deduction IRA; however, it requires a financial commitment from the business. This financial commitment should not be looked at as a burden but as an employee benefit. This is an advantage you as the employer offer that may help attract and retain talent. Employers are required to do one of the following:

A. 2% non-elective contribution - 2% of each eligible employee’s compensation regardless of whether or how much the employee deferred

OR

B. 3% matching contribution - match of employee’s elective deferrals on a dollar-for-dollar basis up to 3% of the employee's compensation.

*May reduce the 3% limit to a lower percentage but in any event not lower than 1%. May not lower the 3% limit for more than two calendar years out of the 5-year period ending with the calendar year the reduction is effective.*

Additionally, contribution limits are higher for Simple IRA’s with employees able to contribute $12,500 annually plus an additional $3,000 for those over the age of 50. This type of plan is ideal for small businesses looking to offer a retirement plan that acts not just as a saving mechanism but as a true employee benefit.

3. 401k

The 401k is the marquee retirement plan for small and large businesses alike. This plan is used by one person businesses all the way up to multinational organizations. Contribution limits are significantly higher with employees able to contribute $18,500 annually plus an additional $6,000 for those over age 50. Although employers are not required to, they can offer a match or a fixed contribution. Additionally, 401k’s have the flexibility of adding a profit sharing component where employers could, on a year by year basis, decide if they want to make a profit sharing contribution to their employees’ accounts.

The downside of a 401k is they add a cost and time burden to the business. Even if an employer were not to implement a match or profit sharing contribution, the business owner would still incur costs. 401ks have annual filing and record keeping requirements that can vary greatly in cost. A 401k is a great option for businesses with 20 or more employees or smaller businesses where many of the participants are expected to participate.

4. Bonus Plan - The Solo 401k

This is very similar to a 401k but it is only for businesses where the only employees are the business owner and/or a spouse. These plans allow for the high contribution limits of traditional 401ks without the same amount of cumbersome filing requirements.

As a final note, in addition to the above listed plans there are many different strategies business owners themselves could implement in order to make the plan really benefit the business owner’s financial plan. Adding components such as a Cash Balance Plan or a Safe Harbor allow the employer a great deal of flexibility and potential for deductions. As a business owner, you have options for the type of retirement plan you wish to offer and those options should be carefully evaluated. The Financial Advisors at FSG are well versed in retirement plans and are ready to talk to you about your options today!

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This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

This article is written by Brice Carter.

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