Creating A Nest Egg for Your Future: Considering Your Retirement Plan Options

Without a doubt, the number one reason to become a business owner is to so that you control your own destiny.  We're not just referring to how you live your day-to-day life, but your long-term future- considering your retirement plan options. 

When you think about the long-term, you should be considering retirement plan options. 

As a business owner, you have so many opportunities to create a huge nest egg for your future. If you are working on growing a business that you can one day sell for millions then great! That is one nest egg.  But don’t put all of your eggs in one basket! 

Things can happen.  You may not have a business that is sellable or perhaps you are not able to sell your business for as much as you had hoped. 

In addition to building a million-dollar business, make sure to also contribute to a retirement account.  As a small business owner, the following are the most common retirement plan options you can choose from. 

Please note: There are always more choices that may be a better fit for you and your business.  Please discuss your options with your financial planner and accountant.

SEP - Simplified Employee Pensions

Why Michelle loves this plan:

I love SEP’s because they are incredibly easy to start and maintain and have excellent limits, but I only love them for those without employees.

Highlights:

This plan is an employer sponsored plan, which means employees do not get the choice to contribute.  At tax time, you can allocate a percentage of compensation that you want to contribute to all employees. 

The plan can be created as late as the due date of the tax return, including extensions, which means you can set up a SEP for a sole proprietor as late as October 15^th.

Another great advantage of SEP’s, is that you can make a decision to contribute from year to year.  If your business has a great year, contribute.  If the business is having a rough year, choose to skip the contributions. 

SEP’s do not have any IRS reporting requirements, which also makes life a bit easier.

The Kicker is: you have to contribute the same percentage to all of your employees as you do yourself. For example: You want to give yourself a 20% contribution and you have an employee with $30,000 income.  You would have to contribute $6000 to the employee’s SEP IRA.

Simple IRA - Savings Incentive Match Plan for Employees

Why Michelle loves this plan:

This is my favorite retirement plan for businesses with employees.  I am a big believer in employee benefits and as a small business owner you can often be limited with what you can offer.  SIMPLE’s are a fairly inexpensive employee benefit that you can offer to your employees.

Highlights:

Employees can contribute and then the company matches up to 3%.  This plan also allows for additional catch-up contributions if you are 50 years old and older.

The SIMPLE IRA does not require any additional IRS reporting; however, you are required to send all employees Form 5304 SIMPLE annually by November 1^st.

The Kicker is: As a business owner, the amount you can contribute is fairly low. 

SIMPLE’s have a second kicker and that is the plan is required to be set up by October 1^st to be eligible for the current year. 

Solo 401k

Why Michelle loves this plan:

This is a fabulous plan for self-employed individuals, especially the consultants of the world.  The Solo 401k gives the employee ( a.k.a business owner) the opportunity to contribute to a ROTH 401k, where as the SEP’s and SIMPLE’s do not have that option.  I see more business owners max out their contributions with a Solo 401k versus any other retirement plan.

Highlights:

As a business owner contributing to a Solo 401k, you wear both hats in this situation: the employee making contributions and the employer that matches.

The employee contributions can be significantly more than the SIMPLE’s maximum contribution. 

Solo 401k plans can also be fairly inexpensive to operate.  The only caveat is, if you have a certain amount in assets at the end of the year, there may be reporting requirements.  Please check with your broker on the filing requirements.

The kicker is: the business owner has to be the only employee in the business.  A spouse is allowed, but only a spouse.  Not a child. 

401k Plans

Why Michelle Loves This Plan

I love 401k’s for the businesses that churn a large profit year after year and can afford these plans.  I also love the fact that Profit Sharing can be added to the plan, allowing you to contribute even more to your retirement account. 

Highlights:

The 401k’s are for companies that have stepped up from a SIMPLE or have added employees so they can no longer participate with a solo 401k.  However, they look very similar to the Solo 401k’s.

The plans consist of both the employee contributions and employer matching.   

Michelle mentioned profit sharing as one of the things she loves about 401k’s.  Profit sharing plans allow the employer to share some of the profits with their employees. 

Employers can determine the amount they want to contribute either quarterly or annually based on earnings. 

The best part is that the contributions are a business write-off and not taxable to employees.  Profit sharing plans act as bonuses to employee’s retirement accounts and they can help motivate the team.

The kicker is: the 401k plans are very expensive.  They require IRS reporting and testing requirements by a third party as well as notification to the employees.

For more information on business retirement plans, visit: https://www.irs.gov/publications/p560