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4 Retirement Plan Options For Your Small Business

Do you own or manage a small business?  If you do, the world is your oyster, at least when it comes to retirement plans.  In a break from the not-so-distant past, there are now many options for small firms and even for sole proprietors to consider. 

The actual list of possibilities is much longer, but the four main contenders in the retirement plan arena for small businesses are:  (1) Simplified Employee Pensions (SEPs), (2) Saving Incentive Match Plans for Employees (SIMPLEs), (3) traditional 401(k) plans, and (4) solo 401(k) plans.  Here's the skinny on each one:

1.  SEPs.  Although a small business may use one of two varieties—the SEP-IRA or the SEP-401(k)—the SEP-IRA is much more common. Generally, the contributions you can make as an employer are based on a percentage of each participant's compensation, up to the annual tax law limits. In an off year, however, you don't have to make any contributions.

For 2014, deductible contributions to an employee's SEP can't exceed 25% of what the employee earns or $52,000 ($57,500 if age 50 or over), whichever is less.  In most cases, you won't have to make an annual report on your plan to the IRS.

2.  SIMPLEs.  The SIMPLE format is available only if a business has no other retirement plan and employs no more than 100 workers making $5,000 or more.  You must match either a predetermined portion of employee contributions to the plan or make a minimum contribution for all plan participants.

Each employee can contribute up to $12,000 to a SIMPLE in 2014 ($14,500 if age 50 or over).  You don't have to file a yearly return for the plan nor are you required to do annual nondiscrimination testing.

3.  Traditional 401(k) plans.  The same 401(k) setup that corporate giants use is also available to small businesses.  But these plans normally require strict nondiscrimination testing; to avoid that, you could use a "safe harbor plan."  That entails matching each eligible employee's contribution, dollar for dollar, up to 3% of compensation, and 50 cents on the dollar for employee contributions exceeding 3% (up to a 5% maximum). With these plans, you can use a system of gradual "vesting" over six years that will return some of your contributions if a worker leaves the company before the end of that time.

As in 401(k)s at larger companies, participants in smaller plans can elect to defer up to $17,500 of their earnings in 2014 ($23,000 if age 50 or over).  As with a SEP-IRA, total deductible contributions in 2014 can't exceed 25% of compensation or $52,000 ($57,500 if age 50 or over), whichever is less. 

4.  Solo 401(k) plans.  A solo 401(k) may cover a business owner who has no employees other than a spouse.  Generally, these plans have the same rules and requirements as traditional 401(k) plans, including the same annual contribution limits.  However, the solo 401(k) does have one decided edge:  Under a special tax law provision, the normal 25% limit for annual contributions doesn't apply.  For some sole proprietors, this rule will let them make larger tax-deductible contributions.

Which of these four plans makes the most sense for you and your business?  There are no hard-and-fast answers.  Do your homework by exploring all the alternatives and making comparisons (see box).  Finally, don't hesitate to ask for our assistance to determine your best course of action.



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