Wes Moss: Retirement plans mean big decisions for small business owners

Wes_Moss-for-Web-smaller-fiCertified 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:

  1. Save for your own retirement
  2. Reduce your overall taxable income
  3. Provide a benefit to both you and your employees.

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:

INDIVIDUAL 401(k)

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.

SEP IRA

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 IRA

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.

401(k) PLAN

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

7 comments Add your comment

[...] Wes Moss: Retirement plans mean big decisions for small business ownersAtlanta Journal Constitution (blog)Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly. … [...]

GRITS1AM

November 22nd, 2010
1:48 pm

where did Rana go?

GRITS1AM

November 22nd, 2010
1:50 pm

ahh……..just saw the other post

Duluth Brad

November 22nd, 2010
2:48 pm

My company offers a Roth 401K. This seems like the best deal of anything because I can save more than I ever could in a regular roth account on an annual basis. Will I be able to do this wherever I work going forward?

Wes Moss

November 22nd, 2010
5:52 pm

The answer is MAYBE…many companies have added the “ROTH 401k option” onto their existing retirement plan. This trend will continue, so it is likely that your next employer will offer something similar…However, you are correct. The ROTH 401k is very useful, and provides much more room to save than a traditional ROTH IRA. It’s a smart idea to use the ROTH 401k option if it is offered to you at work, especially if you think that you are in a lower tax bracket today than you will be in retirement.

Remember that unlike the traditional 401k, your contributions to a ROTH 401k will be with after-tax dollars, as opposed to pre-tax dollars…and under most circumstances distributions from the ROTH 401k will be tax free (provided you stick to the 5 year holding rule and reach the age of 59 ½).

SuwaneeMommy

November 24th, 2010
12:00 pm

I am starting a career selling real estate (employed as an independent contractor). I am also employed full-time as a regular employee for a small business, and contribute 15% to my employer’s IRA. Can I start any of these for earning from my real estate business, or should I just do a Roth?

Ted Jenkin

November 28th, 2010
9:32 pm

A big one that wasn’t mentioned in the list for business owners over the age of 45 with a very profitable business is the idea of a defined benefit plan. These plans are a little more complex, but can afford a business owner the ability to put away a lot more money per year on a pre tax basis than the four plans above (in some cases a couple of hundred thousand dollars per year!). Like any reitrement plan, there are many factors that may make this plan more beneficial than a defined contribution plan, so make sure to run all of the numbers. It can be especially good for older business owners with younger employees who have businesses that generate consistent cash flow.

I agree with Wes to consult with Certified Financial Planner who has expertise in designing these plans so you can get the best one for your business.