Retirement Planning for Small-Business Owners

2006-06-23

If you're a typical small-business owner, you know how many things you need to keep in your head at the same time. Not only must you do an exceptional job in your chosen occupation, but you also have to make sure you take care of all of the technicalities involved in running a small business. Hiring employees can take some of the burden off your shoulders, but employees also bring a host of additional legal requirements into play.

With the many responsibilities that business ownership entails, it's easy to understand why retirement planning often gets placed on the back burner. Yet business owners are uniquely placed to take advantage of some retirement-plan options that most employees don't get to choose from.

Your many options
Several retirement plan options exist for small-business owners. They vary in how much money can be contributed, whether employees other than the owners may participate, what (if any) contributions the employer must make on behalf of employees, what deadlines there are for creating and putting money into the plan, and how hard it is to run the plan. Among the options small businesses commonly use are SIMPLE IRAs, SEP IRAs, profit-sharing plans, SIMPLE 401(k) plans, and single-participant 401(k) plans.

Simple IRAs
Congress likes acronyms, so it picked the name "Savings Incentive Match Plan for Employees" to spell the word "simple." Employers with fewer than 100 employees can choose this option. It allows the owner and any employees to save up to $10,000 per year, indexed for inflation, of their own money; if an employee is older than 50, an additional "catch-up" amount of $2,500 is allowed. The employer must generally either contribute an additional 2% of each employee's compensation to the plan or match 100% of each employee's contribution up to 3%; additional employer contributions are not allowed. The business owner must set up the SIMPLE IRA before October 1, unless the business starts after that date.

Most financial companies offer SIMPLE IRA options at a low cost compared with some other plan options. And as the name suggests, administering SIMPLE IRA plans is relatively easy. However, if you choose this option for your business, you are not allowed to set up any additional type of retirement plan.

SEP IRAs
The Simplified Employee Pension IRA has significant differences from SIMPLE IRAs. Perhaps the biggest difference is that the employer funds the SEP IRAs entirely. The employer is allowed to contribute up to 25% of compensation to the plan, up to an overall maximum of $42,000 per employee (indexed for inflation). Business owners have extra time to set up a SEP IRA; the deadline is the same as the deadline for the business income tax return, which means that most businesses that use a calendar year have until March or April of the following year to set up a SEP IRA.

SEP IRAs are also fairly easy to administer, and many financial companies offer them at a relatively low cost.

Read the rest of this article for more retirement options for small business owners.

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