What is the Best Retirement Plan for Practice?

CHARLESTON, SC---  Choosing the best suited retirement plan for your small business can seem like a daunting task. However, by first determining what you want to accomplish by implementing a retirement plan we can then filter out the characteristics of your business to determine the best plan for you.
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Today, I’m going to go through a few of the main retirement plans and discuss what type of business owner should use each plan, and why.
 
SEP IRA- Simplified Employee Pension
 
# of Employees: 1 (owner) and maybe spouse

Deferrals/Contributions:  $54,000 or 25% of income (whichever is less)

Features:

• Easiest plan to setup
• Contributions are made by the business
  • Contributions are a business expense
  • Therefore, your taxable is lowered by the amount the business contributes to the plan
• For 1099 Employees, your taxable income is lowered dollar for dollar by contributions
• VERY flexible employer contributions
  • As self-employment income fluctuates, so can the contributions
  • Can even be $0 if necessary, no requirements for minimum contributions
  • Can be established up until your income tax filing deadline

 
Great for:

• 1099 Employees
• Business owners that are the only employee
• High earners
• Young owners

Negatives:

• No Loans
• No Roth Option
• No catchup contributions

 
 
 
 
 
Solo 401(k)

# of Employees: This is a 401k for business owners, spouses in the business and partners only; Non-related employees cannot participate

Deferrals/Contributions:  Up to $18,500 in employee salary deferrals; $55,000 max from employee deferrals and employer contributions; $6,000 catchup for 50+ year-olds

Features:

• Loans allowed
• Roth Option
• Catchup contributions allowed
• Employer contributions are deductible on the employer’s federal income tax return
• Plan Fees paid by the employer and NOT out of plan assets are deductible on the employer's federal income tax return
• No discrimination testing

 
Negatives:

• More difficult to setup than SEP IRA
  • Some IRS filing requirements when balance reaches $150,000
• Does not offer non-spouse/partner participation
• Less Flexible than SEP IRA regarding contributions
  • Must abide by plan document in terms of matching employer contributions

 
Great For:

• Husband/Wife small business
• LLCs & LLPs
• Older business owners
• Lower salary earners
• Owners wanting to save big in their retirement plan

 
 
 
SIMPLE IRA- Savings Incentive Match Program for Employees
 
# of Employees: 2-100, who earn at least $5,000/year
 
Deferrals/Contributions:

• $12,500 contribution; $3,000 catchup for 50+ years old.

• Employers must typically match dollar-for-dollar up to 3% OR 2% of employee’s total salary
• Employers can also match less than above limits, but that match must be at least 1% for no more than 2 out of 5 years

 
Features:

• All deferrals and contributions are immediately 100% vested
• Can deduct 100% of employer contributions
• Higher contribution limits than Traditional/Roth IRA
• No discrimination testing necessary
• Must establish between January 1 and October 1
• No age limits for participation
• No cap on elective employer contributions

 
Negatives:

• No loans
• All deferrals and contributions are immediately 100% vested
  • If your business experiences high employee turnover
• Contribution/deferral limits less than SEP & 401(k) plans
• Not allowed to maintain other retirement plan for those who are not eligible for the plan

 
Great For:

• Small businesses with high earners
• Younger employees in a small business
• Businesses with fluctuating profit
• Keeping costs down/simple administration

 
 
 
SIMPLE 401(k)

Same as SIMPLE IRA Except:

• Employers CAN establish a separate retirement plan for employees not eligible for the SIMPLE 401k
• Must be 21 years old to participate in plan
• Loans are allowed
• Employee contributions are capped at $255,000 salary

 
Great For:

• Small businesses with salaries under $255,000
• Owners who want to prevent those under 21 from participating
• Those wanting to simplify the 401(k) establishment process
• Businesses with fluctuating profit
• Keeping costs down/simple administration

 
 
Traditional 401(k)
 
# of Employees: Not Applicable

Deferrals/Contributions:

• Up to $18,500 in employee salary deferrals
• $55,000 max from employee deferrals and employer contributions
  • Can match employee salary % or their contributions up to the limits
• $6,000 catchup for 50+ year-olds

 
Features:

• Employer contributions are deductible on the employer’s federal income tax return
• Plan Fees paid by the employer and NOT out of plan assets are deductible on the employer's federal income tax return
• Vesting schedules can serve as motivation for employee loyalty
• Loans allowed
• Roth options allowed

 
 
Negatives:

• Discrimination testing is required
• Difficult to setup without professional assistance
• Less flexibility with regards to contributions
• Limit of $275,000 salary to determine contribution percentage

 
 
Great For:

• Employers with more than 10 employees
• Owners looking to motivate employee loyalty through vesting schedules
  • Or reduce administration headache if employee turnover is high
• Owners looking to save big in their retirement plans

 
 
Safe Harbor 401(k)
 
Same as Traditional 401(k) Except:

• All deferrals and contributions are immediately 100% vested
• No discrimination testing is required
• Employer Matching Contributions
  • 100% of first 3%, 50% for next 3%, not to exceed 5%
  • OR
  • Non-elective 3% of compensation; to each employees’ account

• Makes a Traditional 401(k) simpler to administer

 
 
 
So, there’s a simple breakdown of many of the popular retirement plans that small businesses utilize. Of course, there are many other rules and regulation I did not cover to keep things concise and less cumbersome to read. Further, there are other retirement plans out there that may be best suited for your unique business. If you’re still not sure which plan would best fit your business, give us a call, fill out a contact form, or email us to schedule a free consultation to determine the best move for you.
 
Low Fee 401k
843-901-7778
Info@lowfee401k.com
www.lowfee401k.com