This article is for informational purposes only and is not a replacement for real-life advice. Consult your tax, legal, and accounting professionals before implementing or modifying a retirement plan.
As a small business owner, choosing a retirement plan involves weighing the needs of your business against the needs of your employees. There are several options available. Here, we cover three of the most common for small businesses: SIMPLE-IRAs, SEP-IRAs, and 401(k)s.
SIMPLE stands for Savings Incentive Match Plan for Employees. This is a traditional IRA set up for employees that allows both employees and employers to contribute.
Employers can choose to offer a matching contribution to employee accounts or make nonelective contributions. Employees may also make salary reduction contributions. Many small business owners choose this option because maintenance costs tend to be lower than those of other plans.
To use a SIMPLE-IRA, your business typically must have fewer than 100 employees and cannot have any other retirement plans in place. Distributions are taxed as ordinary income, and withdrawals before age 59½ may be subject to a 10% federal income tax penalty. Required minimum distributions generally begin at age 73.
A SEP-IRA (Simplified Employee Pension) can be set up by a business of any size, including self-employed individuals. Like the SIMPLE-IRA, it does not carry the start-up and operating costs of a conventional retirement plan.
SEP-IRAs are employer-funded only — employees cannot make their own contributions. Employers must contribute the same percentage to each eligible employee's account. One notable feature: employer contributions can vary from year to year, which can be useful for businesses with fluctuating cash flow.
Distributions are taxed as ordinary income, and withdrawals before age 59½ may be subject to a 10% federal income tax penalty. Required minimum distributions generally begin at age 73.
A 401(k) is funded by employee contributions and, in some cases, employer contributions as well. It offers higher contribution limits than IRA-based plans, which can make it attractive for business owners looking to maximize retirement savings.
Withdrawals are taxed as ordinary income, and withdrawals before age 59½ may be subject to a 10% federal income tax penalty. Required minimum distributions generally begin in the year you turn 73.
The right plan depends on your business size, cash flow, and how much administrative overhead you're prepared to manage.
If you have questions about retirement plan options for your business, let's talk.
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Brent Forrest & Associates, LLC. dba Wela Financial Advisory (Wela) is a registered investment adviser. The information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. This article and images may have been enhanced by utilizing artificial intelligence (AI). Wela may discuss and display, charts, graphs, formulas which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions.
