Setting up a retirement plan for your business provides a way to shelter more of your income from taxes and save money for the future. It could also help your employees do the same. In fact, surveys show that retirement benefits are the third most important consideration fostering employee loyalty, after salary and health coverage.1
Here are a few retirement plans that often work well for the self-employed and owners of small firms.
SEP IRA. You may contribute as much as 25% of your net earnings, up to the $53,000 annual maximum in 2015. If you have employees, you are required to contribute the same percentage of your employees’ salaries to SEP IRAs in their names. Contributions for yourself and/or your employees are generally tax deductible as a business expense. A SEP IRA may be a good option for high-income business owners who want to maximize contributions, and for small businesses with mostly lower-paid employees.
401(k). The annual IRS nondiscrimination testing that normally applies to standard 401(k) plans is not required for plans with a “safe harbor” provision, which typically makes them easier and less expensive for small businesses to maintain. Owners may be able to make larger contributions for themselves (as employee and employer) in exchange for making tax-deductible contributions or “matches” for employees based on one of two formulas.
The maximum employee contribution is $18,000 ($24,000 for those 50 and older) in 2015. The required match is a minimum 100% of each participant’s first 3% of salary plus 50% of the next 2% of salary, or a non-elective contribution equal to 3% of salary for all eligible employees. A match or profit-sharing contribution up to 100% of an employee’s compensation is allowed, up to a $53,000 cap (from both sources, not including catch-up contributions) in 2015.
Solo 401(k). This one-participant plan is only for business owners with no employees. As employee, you can make salary deferrals up to $18,000 in 2015 ($24,000 if you’re 50 or older). As employer, you can also contribute an additional 20% of compensation (25% if the business is incorporated) and deduct it as a business expense. Total contributions (not counting catch-up contributions) are capped at $53,000 in 2015.
Employer-sponsored retirement plan distributions are generally taxed as ordinary income. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty.
1) The Wall Street Journal, September 30, 2013
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2014 Emerald Connect, LLC.