Business owners ask me all the time about setting up a retirement plan for their small business. Making sure there is a nest egg in retirement is important, as is getting a deduction from income for your business currently.
Some of the key questions I get are:
Can I get a tax deduction?
Do I have to cover my employees?
How much does it cost?
How much can I put in?
How do I set one up?
One size doesn’t fit all, but with a little knowledge it doesn’t have to be a burden to figure out.
There are several types of plans, below are a few.
SEP IRA
SIMPLE IRA
Solo 401K
Traditional 401K
How do you know what is right for you? Here are some questions to get you started:
“Do you have a retirement plan set up in the business already?”
Even if a plan is in place, businesses that have been passed on from one generation to another or that have been around a long time may have a plan that no longer makes good sense based on current tax laws or the structure of the business.
“Do you have employees?”
If you don’t have employees and want a plan just for yourself, a great option might be a “Solo 401k”.
Depending on your salary and age, you could contribute up to 54k-60k total for 2017 between two types: Type 1 is Elective Deferral (401K) otherwise known as Employee Contributions, and Type 2 is Employer Contribution or profit sharing.
There are maximum contributions of 20-25% of net income depending on your business structure.
You can also roll over unlimited contributions from other 401k, non-Roth IRA plans, governmental plans or 403b plans.
Any business structure can take advantage of this – Self-employed business owner, partnership, LLC, or corporation.
If you do have employees, you generally have to include them. The question then often becomes “What is the least I can contribute to other employees while maximizing my contribution?”
It is important to speak with a financial planner or bank that can get into the details of how to cover employees and will have plans to fit with what you want to do.
"How much does it cost?"
SEP and SIMPLE IRA plans will be the cheapest and to set up and maintain.
The most expensive will be the Traditional 401k and the cost will depend on the type of plan and number of employees. You can expect to pay a couple thousand to ten thousand or more per year. Once the plan has a quarter of a million in assets, the Department of Labor also requires an audit, adding to the cost.
The Solo 401k for the benefit of just the owners will be less expensive than the traditional plans.
“How much are you comfortable contributing to employees?”
If you have employees you need to cover, it is important to think about not only the current year but future years and balance the desire for tax reduction with employee expectation.
For example, let’s say this year is a good year for your business. Perhaps a large project causes your company to be exceptionally profitable and you implement a retirement plan and take advantage of the tax benefits. If you are not as profitable in future years, what expectations have you set with your employees if you can’t contribute consistently?
Talk to your CPA to optimize your plan. Looking at current and projecting future earnings will help you maximize the tax benefits of the retirement plan while balancing employee expectations.
“Are you working with a specialized financial planner or bank?”
To set up a retirement plan, you should work with a financial planner or bank that specializes in small businesses.
Other Resources:
You can find a complete list of retirement plans on the IRS website:
Check out the Department of Labor website related to retirement plans.
Have a question or want to talk about retirement plans for your business? Contact me:
Nels Larsen, CPA
Guidance Accounting
612-618-5299