Author: Ronald P. White, CPA
April 20, 2017
Being a business owner has a lot of demands placed on you that you probably didn’t even consider while you were an employee. A few current concerns might be: obtaining new business, managing cash flow, choosing health insurance, and/or avoiding debt. One issue that may get put on the back burner is retirement planning. This is typical since you’re concerned with the daily operations of your business that retirement can seem like it’s a long time away. Surprisingly, though, that time will arrive sooner than you think.
Some questions you need to ask yourself are:
- Do I only want to provide this benefit for myself?
- Do I want to provide this benefit to my employees as well as myself?
- What is the right plan that fits my needs and budget?
What are some of your options?
First, there is the IRA (Individual Retirement Account) which anyone can open and make a contribution to up to $5,500 ($6,500 if over age 50).
What if you want to contribute more than this toward your retirement? As a business owner, you have the option to establish a company plan that would allow you the opportunity to contribute a larger amount.
These different vehicles include:
- SEP (Simplified Employee Pension) IRA
- Simple IRA
- 401(k) Plan
- Solo 401(k)
- Pension plan
The first four plans are called “Defined Contribution Plans” and provide the opportunity for you and your employees to set aside money for retirement. Pensions, on the other hand, are Defined Benefit Plans and are funded by the business and provide a fixed benefit at retirement.
This is the simplest option for a business owner to set up. This type allows you to contribute more money than a traditional IRA. This limit is the lesser of $54,000 or 25% of salary. Unlike traditional IRA’s there are no income limits so your business won’t be restricted to a certain income level in order to qualify.
This type of plan is available if the business employs less than 100 individuals. Salary deferrals can be up to $12,500 ($15,500 if over age 50). Although they are smaller in deposits than a 401(k) it is somewhat easier to establish and is still a great way to benefit your employees.
Although a 401(k) plan is one of the more popular plans it is more complex than some of the others and all employees based on certain plan criteria are eligible to participate. This is a great way to defer taxes and reward employees. Plan limits are $54,000 ($60,000 if over age 50) of which $18,000 ($24,000 if over age 50) can be contributed by the employee through salary deferral and the company can contribute an additional $36,000.
Similar to a regular 401(k) plan except that you and your spouse can be the only employees of the company. If you have other employees then you would need to establish a regular 401(k) plan. Plan limits are the same as a 401(k) plan and because of the salary deferral option a Solo 401(k) is usually better than a SEP IRA if you earn a lower salary.
Pension plans are less popular than in years past. They are more complicated and are not easily understood. The difference between the previous plans mentioned and these are although the above plans provide a defined contribution they do not specify the amount you will receive upon retirement. This is usually due to market fluctuations and changes in the amount the company may contribute on a yearly basis.
Under a Pension plan, the amount of the benefit is defined by the plan and the company must fund it on an annual basis in order to meet that obligation. This amount will usually fluctuate based on market conditions and is also based on the age of the employees. This payment is required even though the company may have lost money during the year which may result in a strain on company resources.
On a positive note, pension plans can be implemented in addition to defined contributions plans allowing up to a $215,000 contribution in addition to the $54,000 ($60,000 if over age 50) for certain defined contribution plans for a total of $269,000 ($275,000 if over age 50) tax deferred.
Now that you are armed with this information it’s time to decide when and what type of plan fits your needs and budget. If there are multiple owners of the business, discussions need to be undertaken so that all individuals are in agreement as to the cost to be incurred by the company and the benefits to be offered. Once that is decided it’s time to get with a qualified individual to establish the plan and determine what investment options will be available to the employees.
Don’t wait on making the decision to get started, the more time that the plan is established, the more opportunity to provide this benefit to yourself and your employees, and the greater the reward at the time of retirement.
Meet the author
Ronald P. White, CPA
Ron received his Bachelor of Science in Business Administration at Aquinas College and his CPA certification from the state of Michigan.
His area of concentration is in taxation for family and privately owned businesses as well as individuals, trusts, estates and non-profit organizations.
He is a member of the AICPA, MICPA, and FICPA.