As many as 40 percent of small business owners have no retirement savings or pension plans. However, there are several options for small business owners who want to save for retirement. Your choice of a retirement vehicle depends on the structure of your business and the amount you wish to have at retirement.
Traditional and Roth IRAs
Traditional and Roth IRAs allow a business owner to contribute to an account up to a limit set by the federal government each year. Contributions to a traditional IRA may be deductible depending on income and whether you or your spouse are covered by a retirement plan. For 2012, the contribution limit for both types of IRAs is $5,000, or $6,000 if you are over age 50.
A 401(k) plan can be a good choice for a business wishing to offer a retirement plan to its employees. The advantage of a 401(k) plan is that the contribution limits are fairly high ($17,000 for 2012). A downside is that the company contributes to employees’ accounts, as well. You need to make sure that the benefits are spread out to employees, so be sure you want, and can afford, to offer this same benefit to your employees.
A Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) allows a business to contribute to employees’ pensions based on a percentage of each worker’s earned income. For 2012, the limit is the smaller of $50,000 or 25 percent of the worker’s income. An advantage of this type of plan is that contributions are tax deductible for the business.
Defined Benefit Plan
A defined benefit plan allows a business owner to contribute based on a projected retirement benefit — the amount you want to have at retirement. An actuarial firm would be used to create the plan and determine contribution amounts. A benefit of this type of plan is that it lowers the overall taxable income of the business.
Designed for sole proprietors and their spouses, an Individual 401(k) — also called a solo 401(k) — allows the business owner to contribute up to $50,000 in 2012. Contributions grow tax-deferred. A portion of the contributions to an Individual 401(k) can be a tax deduction.
A Savings Incentive Match Plan for Employees (SIMPLE) IRA allows an employee to place a portion of his or her salary into the account before tax. The contribution limit for 2012 is $11,500; over age 50, the limit is $14,000. The company then matches up to 3 percent of the employee’s earnings. An advantage of this type of account is that the employer contribution is tax deductible.
Each of these retirement plans comes with fees for set up, administration costs, tax filing fees, and other expenses.
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