What is the best retirement plan for small businesses?
Self-employed individuals and small business owners now have a variety of retirement plan options available to them that could potentially provide significant tax advantages while saving for retirement.
| Payroll Deduction IRA |
SEP IRA | Simple IRA | Individual 401(k) | |
|---|---|---|---|---|
| Appropriate for: | • Anyone with earned income | • Self-employed, business owners or have a partnership • Have few or no employees |
• A company with fewer than 100 employees • Want employees to make their own retirement contributions via salary deferrals (unlike a SEP IRA) • Do not have any other active employer-sponsored retirement plan |
• Self-employed or owner-only business with no employees (other than a spouse) • Want to make larger contributions than allowed in a SEP IRA • Desire flexibility in the amount contributed annually |
| Maximum annual contribution in 2019: |
Employee: • $6,000 plus additional $1,000 catch-up if over 50 years old |
Employer: • Up to 25% of compensation but no more than $57,000 |
Employee: • $13,500 plus additional $3,000 catch-up if over 50 years old. Employer: • Either an employer match up to 3% OR an employer non-elective contribution to eligible employees up to 2% |
Total employer/employee contributions cannot exceed $57,000 (plus potential $6,500 for catch-up for $63,500) Employee: • $19,500 plus additional $6,500 catch-up if over 50 years old Employer: • May contribute up to 25% of compensation if self-employed up to $57,000 |
| Key attributes: | • Easy to setup and maintain • Low administrative costs |
• Easiest to setup and maintain • Flexible annual funding requirements • Low administrative costs |
• Salary reduction plan with little administrative paperwork • Employees share responsibility for their retirement • No discrimination testing required • Requires limited level of employer contributions • Partially funded by employee salary deferrals |
• A 401(k) with potentially higher contribution limits than SEP IRA • Features of a 401(k) but easier to administer |
| Who can contribute: | • Employees only | • Employer only | • Employee salary deferral with either employer match or employer non-elective contributions | • Employer contributions plus employee deferrals |
| Drawbacks: | • No deduction for the business • May not be deductible for employees |
• Employer must contribute equally for all eligible employees • No catch-up contributions |
• Inflexible contributions • Lower contribution limits than some other retirement plans |
• Only available to self-employed with no other employees (other than spouse) |
| Vesting: | Immediate | Immediate | Immediate | Immediate |
| Filing requirements: | Employer has no filing requirements | Employer generally has no filing requirements | Employer has no filing requirements | No filing requirement until plan assets reach $250,000 and then Form 5500-EZ |
| Participant loans: | Not permitted | Not permitted | Not permitted | Yes |
| Plan setup deadlines: | Can be setup or terminated at any time | Plan must be adopted by employer’s tax filing deadline, plus extensions, usually April 15 | Established by October 1 | Plan must be adopted by last day of the business tax year (usually 12/31) for which contributions are made |
| Participation: | Not required | Required for all employees who are at least 21 years old who have: • Been employed at least 3 of the preceding 5 years • Earned at least $600 in 2019 |
Participation is required for all employees who: • Are expected to receive at least $5,000 in compensation from business during the year • Received at least this amount from the business in any 2 preceding years |
• Must have no employees (other than spouse) • A partnership is eligible only if each partner owns at least 5% of the business • A corporation is eligible only if it has no employees other than a sole shareholder and his/her spouse |
The above table is for informational purposes and is a high-level overview of potentially available plans. Please consult with a financial advisor or contact us for additional information.
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