Best Retirement Plans for Small Business Owners

Without doubt, small businesses continue to play a crucial role in the economy and remain the locomotive power of innovation and growth. Small businesses account for more than 50% of nonfarm private GDP and employ 56.1 mln. (half of all private-sector workers.)

While everybody wants to be their own boss, being a small business owner has many responsibilities and enormous amount of hard work. Not only you have to paddle your own canoe, but you must also handle a lot of things, like creating a budget, business development, managing people, and never-ending meetings.

Besides business issues, small business owners should think and plan for retirement, which solely falls on their shoulders. Lack of time and understandable desire to re-invest all proceeds back into the business leaves retirement out of scope for many business owners. And that is the root of the problem. The prevailing thinking among business owners is to grow the business, sell it, and fund the retirement. It is an excellent plan except for the fact that 80% of small businesses listed for sale never sell. Just imagine what you would do if it was your case. How would you fund your retirement?

One of the best decisions you can make is to diversify your investments, become less dependent on your business, and start saving for your retirement now. Thankfully, there are a lot of retirement plans that allow:

Tax-deferred money growth
Deduct business expenses and minimize your taxes
Increase employee retention
A tax credit of up to $500

Let’s compare key retirement plans available for small businesses.

	SEP IRA	SIMPLE IRA	SIMPLE 401(k)	Solo 401(k)
Availability	Businesses of any size, including sole proprietors, partnerships, and corporations	Small businesses with 100 or fewer employees Sole proprietors, partnerships, and corporations	Small businesses with 100 or fewer employees who received at least $5,000 in compensation for the preceding calendar year Sole proprietors, partnerships, and corporations	Self-employed or business owners with no employees other than a spouse Sole proprietors, partnerships, and corporations with no common law employees
Key advantages	Easy to set up and operate Low administrative costs Contributions are discretionary and tax deductible Not locked into making contributions each year	Easy to set up and operate Low administrative costs Can choose either to contribute a fixed percentage or match the employee contributions	Easy administration Optional participant loans and hardship withdrawals Not subject to the discrimination rules	Low set up fees High contribution limits Owner’s spouse may participate in the plan
Who contributes	Employer only	Employer and employee	Employer and employee	Employer and employee
Establishment deadline	As late as the due date (including extensions) of the business income tax return for the year you want to establish the plan	Must be established between January 1 and October 1. Operates on a calendar-year basis	Must be established between January 1 and October 1. Operates on a calendar-year basis	By December 31 of the year in which you would like to receive the tax deduction or fiscal-year end
Employee eligibility	Age 21+ Has worked for the employer in at least 3 of the past 5 years Earn at least $600 during the current year	No age requirement Received at least $5,000 in compensation during any past 2 years Expects to receive at least $5,000 during the current calendar year	Age 21+ Has worked for the employer for at least 1 year	No restrictions
Employer contribution limits	The lesser of either 25% of the employee’s compensation or $53,000 for 2015 Contribution rate is uniform	Employer is required to contribute each year either a: 2% nonelective contribution for each eligible employee, OR Match dollar-for-dollar up to 3% of the employee’s compensation 3% matching contribution can be reduced to 1% but for no more than 2 out of 5 years	Employer is required to contribute each year either a: 2% nonelective contribution for each eligible employee, OR Match dollar-for-dollar up to 3% of the employee’s compensation	Up to 25% of self-employment income for incorporated business OR Up to 20% of net earnings from self-employment for unincorporated business Total maximum contribution cannot exceed $53,000 for 2015 ($59,000 if age 50+)
Employee contribution limits	None	100% of compensation up to $12,500 for 2015 $3,000 catch-up contribution (age 50+)	Up to 100% of compensation but no more than $12,500 for 2015 $3,000 catch-up contribution (age 50+)	Up to 100% of compensation but no more than $18,000 for 2015 $6,000 catch-up contribution (age 50+)
Contributions deadlines	Contributions should be made by the due date (including extensions) for filing federal income tax return	Salary deferral contributions must be deposited as soon as possible but no later than the 30th business day of the month following the month in which contributions were withheld from the paycheck Employer matching or nonelective contributions must be deposited by the date employer’s tax return is due (including extensions)	Salary deferral contributions must be deposited as soon as possible but no later than the 15th business day of the month following the month in which contributions were withheld from the paycheck Employer matching or nonelective contributions must be deposited by the date employer’s tax return is due (including extensions)	Salary deferral contributions must be made: by the due date (including extensions) personal tax is filed for sole proprietorships, partnerships and LLC taxed as a sole proprietorship As soon as administratively feasible for corporations and LLC taxed as a corporation Profit-sharing contributions must be deposited by the due date (including extensions) personal tax is filed for sole proprietorships, partnerships and LLC taxed as a sole proprietorship by the due date (including extensions) corporate tax is filed for corporations and LLC taxed as a corporation
Employer filings	Not required	Not required	Form 5500	Form 5500 if plan assets exceed $250,000
Sponsorship of other retirement plans	Allowed	Not allowed	Not allowed	Allowed
Designated Roth account	No	No	Yes	Yes
Vesting	100% vested immediately	100% vested immediately	100% vested immediately	100% vested immediately
Participants loans	Not permitted	Not permitted	Permitted	Permitted
Automatic enrollment	No	Yes	Yes	Yes
In-service withdrawals	Yes May be subject to a 10% penalty if under age 59 ½	Yes May be subject to a 10% (increased to 25% during the first two years) penalty if under age 59 ½	Yes May be subject to a 10% penalty if under age 59 ½	Yes May be subject to a 10% penalty if under age 59 ½
Nondiscrimination testing	No	No	No	No

Choosing the right plan

Before you decide which plan is right for you, there are three main things to consider:

Employee coverage

Are you going to hire employees or operate as a self-employed? For the latter consider a Solo 401(k), otherwise a SEP IRA and SIMPLE would work the best.

Contributions limits

How much are you willing to contribute towards your plan? Have a clear understanding of your potential earnings over the next few years. If your income is expected to be stable and relatively high then the Solo 401(k) is a good option. However, if your income is not going to be stable and will depend on various “what if” scenarios, consider the SEP IRA as it provides more flexibility and discretion over contributions.

Administrative expenses

Even though all plans cost low and easy to operate, the Solo 401(k) can become an issue once plan assets exceed $250,000. Plan in advance.

No matter what plan you choose, the only way to go wrong is not choosing one at all. Each plan provides you with an opportunity to grow your business in a tax-efficient way, generous contributions limits, and backs you up in the retirement just in case something bad happens.

Choosing the right plan

Employee coverage

Contributions limits

Administrative expenses

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