Business retirement plans come in many shapes and sizes, but the things they all have in common are:
- Providing significant tax deductions for business owners while putting money (retirement savings) back in their accounts.
- Attracting and retaining talented employees
Some popular retirement plans for small businesses include SEP-IRAs, Simple IRAs and 401(k) plans.
SEP-IRA
Key Features
- Employer contributions only.
- Contributions must be uniform percentage of pay for each employee.
- Max contribution limits are the lesser of 25% of pay or $57,000 in 2020.
- Plan must cover any employee age 21 or older who has worked for the company at least three of the last five years.
Pros: Easy setup, low administration cost, ideal for employer only business
Cons: Plan can become expensive if owners want to max out their contributions. They would have to make comparable percentage-of-pay contributions for all eligible employees.
Simple IRA plan
Key Features
- Limited to companies with 100 or fewer employees
- Elective pre-tax employee deferrals up to $13,500 in 2020 ($16,500 if age 50 or older)
- Employer contribution must be either 3% match or a 2% fixed contribution for each eligible employee
- Employees who earned $5,000 or more in any two prior years and are expected to earn that much in the current year are eligible to participate.
Pros: Easy to set up and low administrative costs and lower employer contributions compared to the SEP-IRA.
Cons: Annual contribution limits are much lower than SEP-IRAs and 401(k) plans.
401(k) plan
Key Features
- Elective employee deferrals up to $19,500 in 2020 ($26,000 if age 50 or older)
- Employer match and/or profit-sharing contributions are discretionary from year to year
- Max employee/employer contributions for 2020 are $57,000 ($63,500 if age 50 or older)
- Discrimination testing is required by TPA each year, unless the company elects to make “safe harbor” contributions (up to 4% match or fixed contribution of 3% of compensation for each eligible employee).
Pros: High employee deferral and max contribution limits, discretionary nature of employer contributions, allows Roth 401(k) option, and self-directed account via plan website.
Cons: Higher set-up and administrative costs than SEPs or Simples. Testing required if no safe harbor election, more responsibilities as plan sponsor to act as a fiduciary.
Whether your goal is to maximize retirement savings and deductions, provide a plan for your employees at the lowest cost possible, or somewhere in the middle, Wilkins Miller Wealth Management can help you select and design the most appropriate plan to meet your goals.