Building your retirement plan
Learn about retirement financial planning, the current plans available, and more.
If you're building your business for the long haul, it should support you (and your employees) when you're ready to leave it. Fortunately, there are a variety of retirement plans built for small business owners. Here's a brief roundup of the current plans available, the types of organizations they can work for, and their associated contributions.
Simplified Employee Pension Plan (SEP IRA) — For those employers with just a few employees, a SEP IRA is a low-cost, easy-to-maintain option. Funded with tax-deductible employer contributions, all eligible employees must be covered and employee salary deferral contributions are not allowed. SEP IRAs are easy to establish and administer — most adoption agreements are one page. There are no minimum contributions and they can vary by year, so you won't be forced to contribute during slower years. If you're an employee of your own corporation, contribution limits are 25% of compensation, up to $56,000 in 2019, up from $55,000 in 2018. If you're self-employed, the maximum deduction limit is based on your net earnings which takes into consideration your deductible part of your self-employment tax and the contribution itself. Generally, you must contribute to eligible employee accounts at the same salary percentage you contribute to your own account.
Savings Incentive Match Plan for Employees (SIMPLE IRA) — SIMPLE IRAs are available to employers with 100 employees or fewer who don't maintain any other retirement plan. They allow employee salary deferral contributions and employer contributions are mandatory. Eligible employees are those who have earned $5,000 or more in any two years prior and who will earn at least $5,000 this year. Salary deferrals are capped at $13,000, and employees age 50 or older may also defer an additional $3,000 for 2019, the same as in 2018. Employers are required to make contributions to their employees and may choose to either provide a dollar for dollar match, up to 3% of salary, to those who participate in the plan or contribute 2% to everyone who is eligible regardless of participation.
Profit sharing plans — Just what they sound like, profit sharing plans offer you and your employees a chunk of your annual profits, although company profits are not a requirement for contributions. The plan can require 1,000 hours of service during a 12-month period in order to be eligible and participate in the plan. Any business owner is eligible to establish this type of plan. Employee salary deferrals are not allowed.
401(k) — 401(k) plans have become much more diverse during the past few years, encompassing a greater range of business types, including those with just a few employees — there are even individual 401(k) programs. The plan can require 1,000 hours of service during a 12-month period in order to be eligible and participate in the plan. Any business owner is eligible to establish this type of plan. Combined, the employer and employee's contributions cannot exceed $56,000 or $62,000 for 2019 if the employee is age 50 or older by December 31, 2019. Employee salary deferral contributions are limited to $19,000 or $25,000 if the employee is 50 or older as of December 31, 2019.
Solo Defined Benefit plan (Solo-DB) — A defined benefit plan is one in which you set a target monthly or annual dollar benefit that you want to receive when you retire. Your annual contributions to the plan are calculated taking into account your current age, the average of your three highest years of income, your planned retirement age, and balances you have accumulated in the plan. Annual contributions are mandatory, and a higher targeted benefit will result in greater required annual contributions. The plan can require 1,000 hours of service during a 12-month period in order to be eligible and participate in the plan. Any business owner is eligible to establish this type of plan. The key advantage to the Solo-DB plan is that the contributions can be significantly higher, although minimum funding and other requirements may apply.
Regardless of the size of your business, there's a plan that can likely meet your needs. Depending on their complexity, some can be more expensive to start and maintain than others. In addition, the government can help: You may qualify for a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE IRA or certain other plans. The credit equals 50% of the cost to set up and administer the plan, up to a maximum of $500 per year for each of the first three years of the plan. To learn more about the available plan and tax credits, speak with your accountant or financial planner. You can also learn more at the IRS's Tax Information for Retirement Plans Community.