Setting up a Retirement Plan for a Small Business

Starting a small business is exciting. While you get a new business off the ground, it’s hard to think about taking it more than one day at a time. As your employees come on board, however, they’re thinking about their own futures as much as the company’s. This makes establishing employee retirement plans imperative. Read about these options for setting up a retirement plan for a small business.

401(k) Plan

The 401(k), named for its section in our tax code, is perhaps the most recognizable form of retirement plan. Under a 401(k), employees can withhold part of their earnings before taxation and deposit them into a retirement account, which makes strategic investments to grow that money over time. From there, employers may choose to match those contributions as an employment benefit. In a traditional 401(k), contributions are tax-deferred, meaning that an employee will not be taxed on earnings until withdrawal. Employers also have the option of a Roth 401(k), in which contributions arrive in accounts after taxation and therefore pay out in tax-free distributions in retirement.

Simplified Employee Pension Plan

For very small businesses—all the way down to a “me, myself, and I” workforce—the Simplified Employee Pension Plan is an ideal strategy. This plan isn’t just for sole proprietors, however. Under an SEP, an employer can contribute up to $58,000 per year or 25 percent of income. This money goes into SEP-IRAs, which the employer sets up for each participant. This pre-tax money grows for retirement in stocks, bonds, and money market accounts. These high contributions make SEP-IRAs attractive, but because employee contributions must equal employer contributions, the plan is most ideal for sole proprietorships.

Keep It SIMPLE

A Savings Incentive Match Plan for Employees Individual Retirement Account, better known for obvious reasons as a SIMPLE IRA, is another way for employers to set up a retirement plan for a small business. A SIMPLE IRA is quite similar to a SEP, save for one important difference—both the employer and the employee can make contributions to a SIMPLE IRA. This allows for more flexibility than a SEP, in which employers make all contributions on their employees’ behalf. The namesake simplicity of this plan comes into play when bypassing some of the bureaucratic entanglements that accompany qualified retirement plans like 401(k)s.