Choosing the Perfect Retirement Plan for Your Small Business

Choosing the Perfect Retirement Plan for Your Small Business

Close your eyes. Imagine yourself in the future, retired, and living your best life. Are you still running the business you love part-time? Operating a chihuahua rescue? Drinking daiquiris on a cruise ship for the rest of your days?  

No matter the goal, you need a plan to get there. And like a cruise ship buffet, there are plenty of enticing options.  

SIMPLE IRAs, SEPs, and Payroll Deduction IRAs are three retirement options you can offer your employees—whether you are a company of one or ninety-one. Read on to learn the pros and cons of each option, so that you and your team can plan for the future while saving in the present.  

What are the small business benefits of a retirement plan?   

For a small business owner, offering a retirement plan may seem daunting—but it can actually be worth the effort for a host of reasons. Turns out the financial ramifications of planning for the future are quite relevant to the present.  

First off, establishing a retirement plan actually creates value for your business. That’s because when you offer this benefit, you are then eligible for tax credits and deductions. Not to mention saving on business expenses.  

Love a good deal? SEPs and SIMPLE IRAs come with a tax incentive that offsets set-up and operating costs. But be aware, this incentive is only viable for the first three years you offer the plan (up 50% with a max of $500).  

Want to double down? Choose “auto enrollment” for a $500 tax credit during the first three years you use this feature.  

It's also worth noting that your contributions as an employer are tax-deductible. More tax talk? Assets grow tax free inside of your retirement fund (although may be taxed when withdrawn).  

Let's talk about employment. A retirement plan will attract qualified employees and keep them happy. Less money spent on hiring and training means more funds for that 9AM tee time.  

What are SIMPLE IRAs and how do they work? 

If this is your first time setting up a plan and you have fewer than 100 employees, a SIMPLE IRA (or Savings Incentive Match Plan for Employees) is a fantastic option. 

The upside of choosing a SIMPLE IRA is that it’s easy and inexpensive. It's less costly than a more involved retirement plan and doesn’t need any extra filing from the employer. Phew!  

Another pro for this plan is that you share financial responsibility, and it’s low cost. Both the employee and employer contribute, taking some of the financial burden off of you. If an employee chooses the “matching” option, they can contribute up to 3% that you then…match.  

Con? You still must make an obligatory 2% contribution even if an employee doesn't take part.  

While this plan is straightforward, there are some drawbacks. SIMPLE IRAs are not flexible, so you are at the mercy of your contributing employees. Also, the amount saved for retirement may be lower because of the low, fixed percentages.  

What are SEPs and how do they work?  

If a fixed contribution has you sweating like you’re on a beach Tahiti, then consider a more flexible Simple Employee Pension.  

In an SEP, the employer is the only party making contributions. That can feel like a lot of pressure. But an adjustable contribution helps temper this fact.  

The pro for this plan is that it considers cash flow. When business is booming you can make larger contributions. And in leaner years, you can pull back. An SEP lets you contribute up to 25% of your employees’ pay (based on the allowable amount— for 2021 it’s up to $290,000) but you can always re-calibrate.  

Like the SIMPLE IRA, an SEP is easy to use, cost-effective and usually does not require extra filing.  

The downside of this option? You will need to contribute to all your eligible employees' plans equally. This may be tough depending on the size of your company and the percentage you choose.  

Is a Payroll Deduction IRA right for my business?  

If the first two options sound good in theory but aren’t within your financial reach, there is still hope! 

A payroll deduction IRA lets your employees contribute to their IRA independently. This plan takes a part of their paycheck and immediately deposits it into either a Traditional or Roth account.  

The pro for this option is that it encourages your employees to save for retirement. It also comes with low administrative fees for your business. When you don’t have the resources for the plans mentioned earlier, this option will empower your employees to get the ball rolling regardless of your business’ financial situation. 

Is this the “little umbrella in your drink” version versus “villa in Tuscany” when it comes to retirement plans? Sure. But it’s still a step in the right direction and every little bit counts.  

The drawback here is that this plan is subject to the annual limits placed on IRAs. These limits can often be low compared to other plan's savings. And because you aren't contributing, you will miss out on the tax credits and deductions. 

What are you waiting for?  

Setting up a retirement fund for your business is a vital step in growing your company. Not to mention preparing for the future.  

The best time to start saving for retirement is now. Every day you put it off is costing you precious time and money. Plus, without a retirement plan in place, you’re likely losing out on experienced, qualified employees.   

If you feel lost at sea, reach out to Know Your Numbers today. Like a good cruise director, we’re here to explain options and get you on track for your retirement goals.  

What are your tips and tricks when it comes to planning for retirement? Leave them in the comments below. 


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