Factors to Consider When Choosing a Retirement Plan for Your Small Business

The average life expectancy in the U.S is 78.8 years, and we all know people who live well into their 80s and 90s. These days, people are spending 20 or even 30-plus years in retirement. Many experts believe you’ll need 70-90 percent of your preretirement income to maintain your standard of living in retirement.

As a small business owner, offering a retirement plan will help your employees save for the future. There are significant tax advantages not only to your employees, but to your company and yourself. A retirement plan can also make your overall benefits package more appealing so you can attract and retain top talent. Even if you’re self-employed and have no other employees, you can establish and benefit from a retirement plan.

But how do you choose the right retirement plan for your small business?

The number of options can be overwhelming. You have profit-sharing plans. You have defined-contribution plans, the most common of which are various types of 401(k) plans, from a traditional 401(k) to a safe harbor 401(k) to a self-employed 401(k). You have IRA-based plans, such as a SEP (simplified employee pension) IRA, a SIMPLE (savings incentive match plan for employees) IRA, and a payroll deduction IRA. You have defined-benefit plans that offer a specified amount at retirement.

Most small business retirement plans allow the employer to deduct contributions as a business expense. Many offer a tax credit to cover some of the expenses related to starting and maintaining a plan. The primary advantage to the employee is that contributions, and the growth of those contributions over time, aren’t taxed immediately. Income is deferred and taxed, often at a lower rate, when the employee reaches retirement age and begins taking distributions from the plan.

However, different retirement plans have different rules. There isn’t one plan that’s ideal for all companies and all sizes, so small business owners need to do their homework before making a decision.

Questions to Ask When Choosing a Retirement Plan for Your Small Business

When you sit down to evaluate various retirement plans, there are some factors to consider and issues to clarify before deciding what is best for your company and its employees.

How many employees do you have? Which employees are eligible to participate in a retirement plan?

What are the minimum and maximum contribution limits for the employee and/or the employer?

Who can contribute – the employee, the employer, or both?

Is the plan easy to set up and maintain? What are the costs? What are the administrative steps involved, such as adopting a written plan, arranging a fund for the plan’s assets, notifying eligible employees about the terms of the plan, and developing a recordkeeping system?

How will you operate the plan so assets grow and tax benefits are preserved? How will you make contributions, manage assets, provide information to participating employees, distribute benefits, and ensure that the plan complies with current laws? What tax filings are required?

How and when can assets be accessed? What are penalties for early withdrawal? Are there exceptions to these rules?

The Bottom Line

There are far too many retirement plan options to explain in the context of a blog post. You can find plenty of online charts that attempt to explain the pros and cons of each plan, but we feel these charts are generally incomplete and lack the detail required to make such an important decision.

We highly recommend speaking with your accountant and a retirement specialist, asking the questions above, and discussing the specific needs and goals of your organization before choosing which retirement plan(s) to offer.

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Professionals and Executives

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Retired and High Net Worth Individuals