If you're like most business owners, you'd like to maximize the amount of income you can eventually receive from your business, protect that money as best you can from risk and liability, and reduce the amount taxes you pay on that money in the meantime.
Small Business Retirement Plans
Consider starting a retirement plan for your small business. While each option will require you to defer some income for the future, small business retirement plans offer a number of incentives and advantages:
- High contribution limits - even if your income is too high to qualify to deduct traditional IRA contributions for yourself. If you're age 50 or older, contribution limits are even higher for SEPs, 401(k)s and IRAs.
- Tax credits for some individuals, including self-employed individuals, who make contributions.
- Protection from the claims of creditors under federal law
- Tax credits worth up to $1,500 to offset set-up costs for qualifying small businesses.
Business owners can choose to establish a SEP for themselves and qualifying employees, and for those with up to 100 employees, a SIMPLE IRA that allows employees, including owner-employees, to defer up to $12,500 per year, pre-tax, for their own retirement.
Simplified Employee Pension Plans (SEP IRAs)
These plans are easy to set up and maintain, even for self-employed individuals. You can set aside up to 25 percent of compensation, though not more than $53,000. Contributions are not mandatory, but if you have employees, you have to offer the same benefit to all workers over 21 years old, who has been employed for at least three of the past five years, and who earned at least $600 during the year.
You can contribute to an IRA and a SEP for yourself in the same year. SEP contributions do not count against your IRA contribution limit for the year.
Solo 401(k)s
Solo 401(k) plans may be a good choice if you have no employees other than yourself and your spouse. You can set aside up to $18,000 per year in elective deferrals for yourself and for your spouse (up to $36,000 total). If either of you are age 50 or older, that contribution limit is $24,000.
Additionally, the business can make elective contributions of up to 25 percent of compensation (though rules vary somewhat for self-employed individuals, due to the impact of self-employment taxes.
SIMPLE IRAs
This defined contribution pension plan is sort of a simpler, stripped-down versions of the 401(k), with lower costs and fewer administrative headaches. Employers with fewer than 100 employees may establish them and allow employees to defer a portion of their own incomes and contribute them to the plan. Employers can also contribute, or match their employee's contributions, up to 100 percent of 3 percent of the employees' compensation (you can reduce that match to as low as 1 percent in 2 out of 5 years, if business conditions warrant). If you don't match, you can contribute a flat 2 percent of each employee's compensation. All contributions are vested to the employee immediately.
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Basic Understanding
This blog is being provided for informational or educational purposes only. It does not take into an investment objectives or financial situation of any individual, family, prospect, client, or prospective clients. The information is not written or intended as investment advice and is not a recommendation about managing or investing your retirement savings.
An individual seeking information regarding their investment or retirement needs should contact a financial professional.
Neptune Financial, and their financial professionals do not render tax and legal advice. Please consult your tax and legal advisors regarding your personal tax or legal concerns.
