Small Business Retirement Plans
Perhaps you work for a small business that does not offer any retirement plans. Just because a business is small does not mean a retirement plan is out of reach. 401(k) is always popular, even with small businesses. There are also SIMPLE IRA and SEP IRA plans, which have advantages such as immediate 100 percent vesting.
SIMPLE IRA
The Internal Revenue Service defines a SIMPLE (Savings Incentive Match Plan for Employees) IRA as a plan that gives small employers a simplified method to make contributions toward their employees' retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make contributions from their salary before taxes. The employer may or may not make matching contributions. All contributions are made directly to an individual retirement account or individual retirement annuity (IRA) set up for each employee. SIMPLE IRA plans are maintained on a calendar-year basis.
SEP IRA
A SEP (Simplified Employee Pension) IRA is a similar retirement tool primarily designed for the self-employed individual. A SEP IRA might be attractive if you work as a sole proprietor or in a partnership, or if you own a business, whether incorporated or not. S corporations qualify, too. One very appealing feature of a SEP is that you can use it to save dollars for retirement from a service you do as a sideline to your full-time job, even if you also have a retirement plan through your employer. If you are an engineer at a
A SEP IRA is most attractive to the self-employed. If you add employees to your business, each will establish a separate SEP IRA. By law you will be required to contribute the same percentage to each IRA, including yours, based on the wages reported on the W-2. If you envision growing your business by adding staff you will want to consider the ramifications of extending a healthy contribution to their retirement as part of their compensation.
All contributions are made by the employer for a SEP, which is why it is highly tailored for you if you are the employer and paying yourself. Once you start adding other employees, you will have to share the wealth. In fact, you may want to offer a SEP as a way to attract and retain great employees.
As with other retirement tools that draw on pre-tax dollars, any investment earnings will also grow tax-deferred until distributed. A SEP can be opened and contributions made to it any time up to your tax filing, including any extensions you may have. In most cases this would be April 15. No annual contribution is required. Some years the contribution may be zero.
Another benefit of a SEP plan is that it is easy to set up without a mountain of paperwork. The IRS does not require annual reports to be filed, which takes that burden from you as well.
Employee Stock Ownership Plan (ESOP) or Profit Sharing
Some small companies reward their employees by making them owners through an employee stock ownership plan (ESOP). All employees have to agree in order for this to take effect, however. If you are thinking of selling your own small business, an ESOP is a way of liquidating your stake in the business. One desired effect is to transform the thinking of employees to that of owners, viewing the needs of the whole business as they make decisions in their individual positions.
Some bosses offer profit sharing based on how well the bottom line is in any given year, another incentive for a small team to pull together. If you are the boss, you might consider its value as a great motivator. If you are an employee of a small business, particularly one without other pension plan choices, you might ask the boss to contemplate offering it. It is a great incentive to help attract other good workers. Having a group retirement plan can also help the boss fund her own retirement.
