Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
If you are self-employed or own a small business you are too smart to believe that Social Security will provide a dream retirement. But with everything else you have heaped on your plate, you may not have taken the time to implement a company retirement plan. Let’s start right now.
There are three good reasons to establish a retirement plan for your small business:
You may think retirement plans are too expensive for your company. Not necessarily. There are several options that allow you to tailor to your needs and budget. Among the more popular offerings:
If you are self-employed or working with your spouse, it’s hard to beat the Individual or “Solo” 401(k). The expenses and administration costs are minimal and your investment options are nearly limitless. I like Schwab’s Individual 401(k) Plan. In a nutshell, you can defer up to $49,000 of income a year ($54,500 if you’re over age 50) depending on your total compensation.
This plan allows you to defer up to $49,000 or up to 20% of your net self-employment income. You also have to contribute to the SEP IRAs of your employees. So, if you have 3 employees and you defer 15% of your income into a SEP, you’ll have to do the same for them. A SEP program can get expensive as your payroll grows. But contributions are tax deductible, these plans are easy to implement and as with most custodians are very inexpensive to maintain.
SIMPLE stands for Savings Incentive Match Plan for Employees. However, this option is not as “simple” as the name suggests. Employees can contribute up to $11,500 or $14,000 if the participant is 50 or older. Employers MUST match some of these contributions from 1% to 3%. The fact that matching is required and not optional makes this a less-popular option among small business owners who have multiple employees.
The traditional 401(k) is a good option for business owners with 3 or more employees who would like to offer a benefit to employees by having a plan, but limit the costs of having to match employee contributions. You can structure a 401(k) plan that has NO matching for employees, one that matches a large percentage of contributions or establish a “safe harbor” 401(k) plan that will commit you to a set percentage amount of matching each year. Most importantly, a 401(k) allows employees to defer or “contribute” up to $16,500 per year — $22,000 if age 50 and above.
Many small businesspeople think 401(k)’s are expensive to maintain and that employers MUST match employee contributions. In reality, 401(k) plans come in many shapes and sizes and can be customized to fit your needs as a business owner and the retirement savings needs of your employees.
A final word of advice: Don’t make this decision by yourself. When it comes to selecting and implementing a retirement plan, the devil is in the details – and there are a lot of details. Before you settle on a plan for you and your company, speak one-on-one with a Certified Financial Planner® professional who specializes in establishing retirement plans.
– By Wes Moss, Atlanta Bargain Hunter blog