As a business owner, you have numerous responsibilities – every financial decision you make inevitably affects the firm’s budget, and this refers to retirement plans, as well. In spite of this, a significant percentage of small business owners don’t have a retirement plan. That’s because numerous entrepreneurs choose to direct a noteworthy amount of their savings in their business.
Regardless of that, it’s time to consider your options, in order to make the best decision for your future financial security.
- SEP IRA
The SEP IRA – or the simplified employee pension is worth considering if you are a sole proprietor, and you intend on saving for retirement without worrying too much about the administration of the account. In contrast with the Solo 401(k), this plan covers employees, as well; thus, facilitating business growth. A significant advantage is that this retirement plan is easy to set up and maintain.
Nevertheless, bear in mind that these cash balance plans are funded entirely by the employer. As a potential disadvantage, they can be quite expensive, considering that you want to save money. And, in the position of an employer, you don’t have to make a contribution yearly, but you have to contribute the same percentage for you and your employees.
- Simple IRA
The Savings Incentive Match Plan is a decent option for businesses that have fewer than 100 employees. Additionally, you have the option of establishing a specific IRA for every employee. Moving on, employees have the option of making salary deferral contributions – they can reach 100 percent of compensation.
On a different note, this retirement plan facilitates tax-deductible contributions. Notwithstanding, the annual limit is of $12,500. So, what are the benefits of this plan? The main advantage is that there are very few administrative burdens, whereas the setup is rather easy.
- 401(k) plans
Recently, 401(k) plans have become accepted for businesses. They allow employees to contribute a specific portion of their own income for retirement. Even though these plans are more complex, they facilitate higher contribution limits in comparison with Simple IRA plans and IRAs. Thus, they allow employees to maximize their savings over the course of time.
- Roth IRA
Sole proprietors could opt for this business plan in order to supplement retirement savings. The only condition is for your income to contribute to the specific eligibility criteria. There is the possibility, for instance, of funding a Roth IRA and a SEP or Simple IRA.
The contributions, however, are made from after-tax income. Presumably, the greatest benefit is that the distributions are tax-free. Nonetheless, as a significant drawback, it’s worth noting that this retirement plan is restricted to the basic income. In other words, it isn’t a good option for high earners.
If you’re uncertain regarding the right retirement plan for your needs, take the time to research your options carefully. This way, you can ensure that you’ll make a sensible decision for your future. Each option comes with a range of pros and cons – and your circumstances alone should dictate the conclusion you’ll come at.
