Setting up a retirement plan for your small business may seem daunting, but it can increase your appeal as an employer, offer significant tax deductions, and help you prepare for your own future.
Retirement Plan Benefits
As a small business owner, you know that planning for the future is important. It’s up to you to plan and save for your retirement, which can easily get overlooked when in the day-to-day weeds of running a business.
A retirement plan offers you and your business a number of benefits including:
- Demonstrating that you are an established employer
- Attracting prospective employees
- Retaining current employees
- Tax advantages for you, your employees and your business (depending on the type of plan)
To set up and maintain a small business retirement plan, working with a financial advisor who has expertise in retirement plans is recommended. A retirement plan can be established for your business at any time, but for most types of plans, plan changes must be made by October each year.
Plans for Individuals
If you run your business solo, there are a number of options for you to build a nest egg for retirement.
If you don’t have employees, a Traditional IRA (individual retirement account) may be the best and simplest option for you. A Traditional IRA is ideal if you plan to save $6,000 or less annually for your retirement.
A Traditional IRA is a personal account, not an employer-sponsored account. Contributions made to a Traditional IRA may be tax deductible, meaning you don’t pay federal income taxes on what you pay into one (Traditional IRA contributions are often referred to as pre-tax contributions). Thanks to this tax advantage, earnings on your contributions are tax-deferred – they won’t be taxed until you make qualified withdrawals in your retirement years.
A Roth IRA is similar to a Traditional IRA except that contributions are taxed in the year they are made (Roth IRA contributions are often referred to as after-tax contributions).
Since taxes are paid on Roth IRA contributions upfront, qualified Roth IRA withdrawals are tax-free once you reach retirement age. This is a powerful way to enable your money to grow without paying additional taxes on the principal investment or growth!
A SEP-IRA is also similar to a Traditional IRA, and also applies to small businesses in which the owner is the sole employee.
Contributions to a SEP-IRA are tax deductible. The contribution limit is typically about a quarter of your business’s profit. A SEP-IRA can be used by a business with more than one employee but, for this retirement plan, the business is the primary contributor for each employee — so it is usually inefficient and costly for businesses who employ more than one person.
A unique benefit of a SEP-IRA is that you can contribute any time up to the tax filing deadline in a given year.
If you own a business that employs no more than yourself and a spouse, you may want to consider an individual 401(k) plan.
An Individual 401(k) has a contribution limit of 100% of your earnings up to a maximum of $20,500. Plus, you can match your own contributions. Consulting with a financial advisor is recommended to customize an individual 401(k) for your specific situation.
Plans for Small Teams
A SIMPLE-IRA retirement plan is common for small businesses with 1-100 employees.
For this type of plan, the employee is the main contributor and the business matches up to a certain amount or percentage of the employee’s contribution. The contribution limit for 2022 is $14,000, and the employer match is typically 3% of employee contributions.
SIMPLE IRA plans are relatively easy to set up with minimal cost.
Small Plan 401(k)
A Small Plan 401(k) is ideal for businesses with over 100 employees, or businesses that want to contribute more than the limits set for other types of small business retirement plans.
Starting and maintaining a 401(k) plan involves more administrative time and cost, as there are many compliance requirements that must be met. However, the investment may be worth it, as employees can contribute up to 100% of their earnings up to a maximum of $20,500, and your business can have more control over your employer match.
Need help? Contact Gift CPAs!
The Gift CPAs team is here to help you as you manage and grow your business. Our specialty is helping small businesses thrive. We serve as consultants and also work closely with wealth management partners to set you up for success.
We look forward to meeting you virtually or at one of our five locations in Harrisburg, Mechanicsburg, Myerstown, Ephrata or Lancaster!