Employees can’t go anywhere without being told to save for retirement, but the warning is valid, especially considering the state of social security. Fortunately for business owners, retirement programs come with great tax incentives, courtesy of Uncle Sam. If you’re looking to expand your company’s benefits program, here are five retirement plans to consider.
This traditional route is available to businesses of any size. As the owner, you withhold employee contributions directly from paychecks. All money goes in pretaxed and grows tax free. Employees can contribute up to $18,000 for 2016 or up to $24,000 if they are age 50 or older. You can make a nonelective employer contribution of up to three percent of an employee’s salary. The other option is to match a percentage of what the employee puts in. The total annual contribution to a single employee account for 2016 is limited to the lesser of $53,000 or the employee’s annual salary.
- Pros: Employees enjoy the flexibility to choose their contribution amounts. You can still have other retirement plans. Your contributions are deductible as business expenses.
- Cons: Administrative costs are usually high, and you’re required to file Form 5500 every year. 401(k) plans are strictly regulated. You’ll be subject to testing to ensure that you are not discriminating in favor of highly compensated employees.
This option is designed for self-employed individuals or a business owner and his or her spouse. Solo plans follow the same rules as the traditional 401(k).
- Pros: You can contribute as an employee and an employer. You can also lower your election when business is bad. Employer contributions are tax deductible.
- Cons: Setup requires an account administrator, and it will cost you a bit of money to maintain. You’ll need to fill out Form 5500 for any account in excess of $250,000.
The Savings Incentive Match Plan for Employees is designed for small businesses. It’s also available to government and tax-exempt entities. In order to establish a SIMPLE IRA, you must have 100 or fewer employees on your payroll. Each must earn at least $5,000 per year, and you can’t have any other qualified plan. Employees can contribute up to $12,500 in 2016. Employees age 50 and older get an additional $2,500.
- Pros: It’s affordable and easy to maintain. There are no administrator fees, and any setup costs are easy to write off as business expenses. Most importantly, all of your contributions are tax deductible.
- Cons: Contribution limits are relatively low and count against the $18,000 annual limit for 401(k). Plus, you are required to contribute as an employer. All accounts must be opened by October 1, and SIMPLE IRAs come with penalties of up to 25 percent for early withdrawal.
The Simplified Employee Pension plan is available to partnerships, sole proprietors, corporations and S-corps. Owners with no more than one or two employees stand the most to gain.
- Pros: SEP is affordable, quick to setup, easy to maintain and can be canceled at any time. As the employer, you make 100 percent of the contribution. The limit is 25 percent of an employee’s salary, and contributions don’t affect other accounts. Of course, everything you put in is tax deductible, and you pay zero tax on the earnings. Plus, you may qualify for a $500 credit for the first three years.
- Cons: Employees are not allowed to contribute, but all your employees must be included. Furthermore, percentages must be equal across the board. You can’t contribute more or less to your own account.
A company retirement plan can benefit both you and your employees. It’s also a great way to retain top talent, especially if you run a tech startup. Just be sure to weigh the pros and cons and to make your selection based on a long-term outlook.
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