Small Business Retirement Plans And Taxes
What retirement savings options do I have as a small business owner?
There are many retirement plans available to people with businesses, or self-employed people, such as SEP-IRA - which are very easy to set up and don't require a lot of filing of forms with the federal government. They also allow for discretionary contributions to what's called “defined contribution”, which usually involves a mandatory contribution every year, to “defined benefit”, which takes into account one's number of years to retirement and one's retirement goals. That type of a plan would afford probably the largest deduction. Different retirement plans come with different requirements, and different plans also cost differently in terms of administration fees. You should be sure to take the time to evaluate the proper plan for your businesses.
What's a "SEP IRA"?
A SEP IRA is a plan that allows you to put away up to 25 percent of your net income. In 2007, if you are under 50, you could put away up to $45,000, and if you are over 50, you could put away up to $50,000. Generally a SEP IRA has very little, if any, administration costs, and is easy to maintain. The downside, in some people's eyes, of a SEP IRA is that proportionate contributions must be made – so if a business owner is putting away 20 percent of his or her compensation, they must also put away 20 percent of the employee's compensation.
What's a SIMPLE plan?
A SIMPLE plan is just as it infers, very simple to keep track of. It's really an IRA, where an employee puts money into an IRA for an employee. The maximum deduction for 27 is $1,5. And the employer generally matches any amount that an employee would have withheld from their salaries. So if an employee has $25 withheld before taxes during the year, the employer would generally match that. As a small business owner, you can, in fact, set up a SIMPLE plan for yourself and separate accounts for each of your employees. So if you have five employees, you would have six different SIMPLE accounts and money would be placed into each account. While the advantages of a SIMPLE plan are that the administrative costs are very, very low, and it's, for most people, conceptually easy to understand, also the limits are a little bit lower than with other types of plans, at $1,5 for example, as compared to a $45, limit for a profit-sharing plan, or a SEP IRA.
What is a "KEOGH"?
A KEOGH plan is a term that's used interchangeably with SEP IRA. At one time, they really were called KEOGH plans. The more commonly used term now is SEP IRA. A KEOGH is based on the same principle, that you put away a percentage of your net income, and that contributions are generally discretionary. If you have a good year, you can put away the maximum, which is up to 25 percent of your net income. If you have a bad year, you're not obligated to put away any money at all by the KEOGH plan.
What's a "401k"?
A 401k plan is a plan that employees generally use to put away pre-tax dollars. For 2007, a person under 50 can put away up to $15,500. If you're over 50, you can put away $20,500. What it does is lower your taxable wages, so you may have gross wages of $50,000 and put $10,000 into a 401k so that your taxable wages are only $40,000. You're really putting away what we call pre-tax dollars. One generally has to be an employee to participate in a 401k, but business owners are frequently employees of their incorporated businesses so it may be possible for a business owner to participate in a 401k as well. You can employ a 401k in tandem with another type of retirement plan to increase the amount that can be put away and deducted.
What factors should I weigh when choosing a small business retirement plan?
In terms of choosing a retirement plan, the biggest thing to look at is whether contributions are mandatory or discretionary. It's nice to have flexibility, and that would mean discretionary contributions. The other thing to look at is number of years to retirement if you're a business owner. If you're closer to retirement and you haven't gotten started yet, you might want to try to put away more money. And the third consideration is how much needs to be contributed for employees. There's generally an employee-employer balance and employers seek to maximize the amount of the pie, if you will, that they are able to maintain for themselves. The biggest component to be aware of is whether or not contributions are discretionary or mandatory. Because with a mandatory contribution, you could be obligated to put money in your plan even in a year when your business is showing a loss, maybe when you might not have funds available, so the key component is discretionary vs mandatory.
