Retirement plans are not only meant for large corporations. Here are a few plans that might be the right fit for your company.
Small businesses often think that retirement plans are only for large corporations. But a defined pension plan can do wonders for a company with few or more employees.
The suited plan is the 401(k) plan, which can help with tax savings along with providing a proper, secure retirement plan for your employees.
Small businesses can benefit from a proper retirement plan with not only tax breaks, but can also help you attract the best talent.
If you are a small business that is offering its employees a retirement plan, chances are there will be many people who want to work at your organization.
Tax Breaks for the Small Business Owner
Small business owners or those who own startups are eligible for tax breaks if:
- They have less than 100 employees who are paid more than $5,000 in the previous year
They haven’t offered a retirement plan to their employees in the last three years.
- They have an employee who hasn’t been compensated who is willing to participate.
Eligible business owners can use Form 8881 to claim credit of up to $500 which can be counted as the cost incurred to establish an eligible plan.
Choose the Right Type of Retirement Plan
To choose the right retirement plan, be clear with what you are trying to establish. Are you looking for a plan where ease of administration will not be an important consideration?
Is it a must for employees to contribute?
What are the priorities of your employees?
Here are a few retirement plans that are perfect for small business owners:
• Traditional 401(k)
The traditional IRA or 401(k) is a retirement plan that is best for small businesses with more than 8 employees, all of whom are willing to contribute.
In 401(k) employees can contribute up to $56,000 pre-tax each year through salary deferrals, employee matching, and profit sharing.
• Safe Harbour401(k)
This is the most popular 401(k) option for small businesses with high-earning employers who have more than 8 employees.
Safe Harbor makes it easy for employers to maximize contributions to their own accounts while avoiding the hassles of IRS’s non-discrimination testing.
• Solo 401(k)
Setting up a self-directed Solo 401(k) is a smart strategy for small business owners. Solo 401(k) is for businesses that don’t have any full-time employees other than the employer and his spouse. Other than this, Solo 401(k) is like a traditional 401(k), but without almost any administration cost. Solo 401 (k) can invest in real estate and other assets if they choose certain providers.
• Roth 401(k)
Introduced in 2006, this retirement plan combines the features of a 401(k) with a Roth IRA.
Like the 401(k), the employer can match your contributions. Also, just like the Roth 401(k) allows you to make contributions after taxes have been deducted.
After you retire, you can withdraw the amount sans the tax.
A Roth IRA (Individual Retirement Account) lets you pay your taxes on the money you deposit upfront. This means that any withdrawals you make from this account after the retirement age (59 and a half) are exempt from taxes, if you have had the account for more than 5 years.
Retirement plans can be difficult to navigate alone because they are subject to complex government laws. It’s best to consult a professional who can help you choose which retirement plan is right for you and your employees, and which will give you the maximum tax benefits.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning. Over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement.
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