When you’re at the helm of a small business or startup, you spend your days thinking about the immediate expenses at hand. With tight margins and limited capital, every cent counts.
As such, it comes as no surprise that 71% of small-to-midsized businesses without retirement plans in place cite “expense” as their chief reason for abandoning this step.
Still, offering a benefits package that includes retirement can set your business apart from the rest and make it more attractive to prospects. Today, we’re exploring four different small business retirement plans to help guide your decision.
Ready to learn more? Let’s go!
SEP-IRA
A SEP-IRA plan stands for Simplified Employee Pension Individual Retirement Arrangement. It is a variation on the traditional IRA plan, and one of the most common retirement plans for small business owners.
This plan allows employers to set money aside for both themselves and their employees, with employers contributing up to 25% of each employee’s pay. In this setup, the employee retains ownership over all of the money, though only the employer can contribute to the account.
As the employer, you’re required to contribute the same amount to each employee, though the amount you contribute is flexible and adjustable based on your cash flow needs.
Benefits of Plan
The benefits of a SEP-IRA plan include:
- No employer-based filing requirements
- No setup and operating costs
- Available to any size business
- Range of investment choices
- Flexible annual funding requirements
SIMPLE IRA
In this case, SIMPLE stands for Savings Incentive Match Plan for Employees.
Unlike the SEP-IRA, in which only employers could contribute, a SIMPLE IRA allows both employees and employers to set aside money toward their retirement.
Under this tax-deferred retirement savings plan, employers can contribute in one of two ways. First, they can contribute up to 3% of an employee’s compensation if the employee also elects to make a contribution. Or, if the employee does not choose to contribute, employers will contribute 2%.
In 2019, the SIMPLE IRA contribution limits are $13,000 for those younger than 30 with an additional $3,000 “catch-up” contribution for those 50 and older (totaling $16,000).
A SIMPLE IRA plan is limited to small businesses with a workforce that does not exceed 100 employees earning at least $5,000 in compensation over the previous year. Similar to the SEP-IRA, the SIMPLE IRA does not include any employer-based filing requirements.
Benefits of Plan
The benefits of a SIMPLE IRA plan include:
- A salary deferral plan with less administration
- Electronic funding options
- The ability to customize contribution allocations for each participant
- Range of investment choices
SIMPLE 401(k)
A SIMPLE 401k plan blends features from both a SIMPLE IRA plan and a traditional 401(k) plan. Both plans require companies to have no more than 100 employees who have earned at least $5,000.
One of the biggest differences is that the SIMPLE 401(k) plan has an age requirement. Employees must be 21 years old to participate in this retirement savings plan. They must also perform in their roles for one year to be eligible.
Another main difference is that employees with a SIMPLE 401(k) plan can take out money on loan from the fund, an action that’s prohibited with a SIMPLE IRA.
Benefits of Plan
The benefits of a SIMPLE 401(k) include:
- Flexibility in plan design
- Ability to take out money on loan
Solo 401(k)
Also known as a Self Employed 401(k) or Individual 401(k), a Solo 401(k) is ideal for employers who have no full-time employees on staff other than the business owner and a spouse.
Under this plan, the participant can set aside funds and designate them for retirement, deferring tax payments on them until retirement age.
Participants can contribute to the plan via both elective deferrals (up to 100% of compensation with a $19,000 limit in 2019) as well as through employer non-elective contributions (up to 25% of compensation). Total contributions in 2019 cannot exceed $56,000.
Benefits of Plan
The benefits of a SOLO 401(k) include:
- Higher contribution limits than SEP IRA
- Range of investment choices
Researching Small Business Retirement Plans
As this list illustrates, there are myriads of small business retirement plans. Finding the best one for your company means taking into account how you plan to scale, grow and diversify your growing enterprise.
As you research your options and plan for your future, we’d love to help.
Check back in with our blog often for more resources, tips, and advice centered on helping startup and small business owners find the success they deserve!