Many retirement plans focus on the needs of large businesses with hundreds or thousands of employees. That makes it frustrating when small business owners try to provide reliable retirement plans for themselves and their employees. Luckily, businesses of all sizes have options. You just need to know which ones could work well for you.
SIMPLE IRA Retirement Plan
SIMPLE is just an acronym that means for “savings incentive match plan for employees,” which tells you quite a bit more about the plan. It is, however, a rather easy approach for many small businesses to help their employees plan for retirement.
The SIMPLE IRA requires employers to match employee contributions. That’s nice for business owners who want to attract the most successful candidates in their fields. It’s not so great for those who want to keep the cost of benefits down.
A SIMPLE IRA also forces employers to start matching employee contributions immediately. Essentially, the employee is vested as soon as you hire her. That’s fine as long as you know you will get great performance from a reliable employee.
Employers looking to save a little bit can sleep easier knowing that the SIMPLE IRA has an $11,500 contribution limit for employees. That’s $5,000 less than a 401(k) plan, which could mean that you end up contributing less with this option.
SEP IRA Retirement Plan
If your business can afford to fund your employees’ retirement funds without any contributions from the employees, then an SEP IRA will probably meet your needs best.
The letters in SEP stand for “simplified employee pension.” The name pretty much tells you what it is. Instead of a retirement fund that accepts contributions from the employee and employer, it acts more like a pension fund that requires the employer to pay in.
Unlike 401(k) plans, the SEP IRA retirement plan doesn’t offer many features. That can make management easier and more affordable.
401(k) Retirement Plans
401(k) retirement plans work well for businesses of all sizes. Many small businesses find that their flexibility suits the needs of employees.
With a 401(k) plan, employees and employers can make contributions. It’s customary for the employer to match a percentage of the employee’s contribution. The employer, however, doesn’t have to match contributions. Employers who want to give their workers a retirement option without contributing cash, therefore, often find this option attractive.
401(k) plans also have plenty of perks for employees. The accounts have extremely high contribution limits. Anyone under 50 can contribute up to $16,500 a year. Those over 50 can contribute a whopping $22,000 to catch up on their retirement savings.
Employers and employees might also like that their contributions don’t get taxed. That’s nice for companies trying to keep their tax burdens down while doing right by their workers. The money does, however, get taxed when employees deduct it from the account.
If you or your employees are worried about paying hefty taxes in the future, explore Roth 401(k) options that charge taxes upfront but allow tax-free withdrawals after retirement.
As a small business, you have plenty of options. Consider the advantages and disadvantages of each to choose a plan that’s right for you and your employees.
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