There are millions of Americans that own their own business but do not know their options concerning retirement plans for their business. There are a number of different options to consider when trying to decide what option is the best to them. In todays article we are going to discuss the various options available.
Keep in mind the rules can be slightly different depending if you are self employed, have an LLC, S or C Corp. I would consult with your tax accountant on the best structure based on your entity structure and financial situation of the company.
SEP IRA: SIMPLE EMPLOYEE PENSION INDIVUDUAL RETIREMENT ARRANGMENT
An IRA for business owners and their employees. It is similar to a profit sharing 401k but has some advantages over a 401k:
- The cost to maintain a SEP IRA are very low
- The IRA custodian you are working with reports everything to the IRA via a 5498 form. You do not need to file a SEP tax return at the end of the year
- Unlike a 401k you do not need to hire a TPA (Third Party Administer) to run, maintain, report, and run testing each year on the plan
If you have employees through your business then all employees must receive the same benefit as any other employee. The following are the rules regarding what employees are eligible for the SEP IRA.
- Must be 21 years old
- Must have worked for the company at least 3 of the previous 5 years
- Must receive at least 500 in compensation
SEP IRA contributions are treated as profit sharing, similar to a 401k. The employer may contribute up to 25% of the employees wage (i.e. employee earns 50k, the SEP IRA can contribute up to 12,500 in profit sharing). The total contributions cannot exceed the maximum total contributions for the year (51k in 2013 and 52k for 2014). As stated before, check with your tax accountant based on the entity structure you have as the numbers above can change slightly.
SIMPLE IRA: SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES OF INDIVIDUAL RETIREMENT PLANS
An IRA that is similar to a SEP IRA with one difference. A SIMPLE IRA allows employees to contribute part of their salary to the SIMPLE plan wheras the SEP is only a company profit sharing plan. The company also has the ability to match profit sharing funds. A SIMPLE IRA is also very similar to a 401k but allows the same benefits as the SEP IRA above. (low cost and less reporting)
The employee contributions are limited to 12,000 for 2013 and the company matching is much less that the matching done by a SEP. For more information about company matching rules you can reference the following IRS link http://www.irs.gov/Retirement-Plans/Operating-a-SIMPLE-IRA-Plan
Self Directed 401k (solo 401k plan)
Most people are most familiar with 401k plans because most large businesses choose to sponsor 401k rather than SEPs or SIMPLE IRAs. A Self Directed 401k has similarities with a SIMPLE IRA. The employee is able to contribute up to 17,500 from his salary and the company can match up to 25% of his salary. The maximum combined contributions between employee and employer is 51,000 for 2013.
With a Self Directed 401k with employees, the employer must comply with IRA regulations on reporting. It is recommended that you hire a TPA (Third Party Administrator) to handle reporting requirement to the IRA and testing requirements to ensure all employees are allowed participation in the plan.
For more information about Solo 401k plans you can reference the following IRS link http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans
There are many different options for retirement plans inside of a business and all options have their benefits and disadvantages. The information above is for educational purposes only and amounts can change with each year or each entity. If you have any more questions about Self Directed Small Business Retirement Plans feel free to contact us so we can review your specific situation.
Author: Ben Barker, Self Directed IRA Professional