Retirement Plans

This month I wanted to give just a quick overview of some common retirement plans for small businesses, with a few pros and cons of each. This is certainly not comprehensive, but rather meant to give you a feel for some of the options out there. If you have any questions about these plans, including which one might be right for you and/or how to get one started, let us know.

SEP IRA (OverviewFAQ)
The basic idea with a SEP is that the company contributes a flat percentage (up to 25%) of each employee’s wages to an IRA in their name. The employee does not contribute any of their own money, which is different than most other plans. One of the best things about a SEP is that it has higher contribution limits than other plans, as much as $50k+/year. And unlike most other plans which have to be set up before the end of the year, you can set up a SEP and make contributions for the prior year as late as the tax return due date (including extensions). And it’s lightweight; there are no reporting requirements at the end of the year. The main downside to this plan is that if you have employees, you have to cover them as well.

With a SIMPLE, employees can choose to defer up to $12k of their wages, and the company either contributes a flat 2% of wages or matches the employee’s contributions (up to 3%). The benefit is that unlike a SEP, the company only has to contribute 2 or 3% of each employee’s wages, so it’s not too expensive. And unlike a SEP, employees can choose to opt out if they want. Also lightweight, with no annual reporting requirements.

SIMPLE 401(k) (Overview)
This is pretty similar to the SIMPLE IRA. The primary difference I’m aware of is that as with a traditional 401(k), employees are allowed to borrow from their account balance (unlike with a SEP/SIMPLE). The main downside is that an annual report is required (Form 5500).

Traditional 401(k) (Overview)
This is more common with bigger companies. There are no limits on number of employees (some of the other plans I mentioned are limited to 100 employees). Like the SIMPLE version, each employee chooses to defer as much as they want (up to around $17k/year), and the company matches a certain amount. The biggest downside is that there are annual reporting requirements, so these plans are generally administered by professional companies, which can get expensive.

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