You don’t have to spend a lot of money to provide a retirement savings plan for yourself and your employees. But with more immediate financial concerns — from making payroll to managing health care costs — facing your small business, you may wonder why you should even bother.
The U.S. Department of Labor contends that offering a retirement plan is worthwhile because:
- Retirement benefits help your company attract and retain talent.
- A retirement plan helps you and your employees save for the future.
- You receive a tax advantage when you choose to contribute money to employees’ retirement accounts.
Beyond that, planning for retirement is an investment in the future at every stage of business ownership. “Social Security was never meant to provide for a full retirement,” notes Charles Woolston, a CPA and shareholder at Cowan, Gunteski & Co. in New Jersey. “In future years, an individual’s retirement savings is going to have to provide a larger percentage of retirement cash needs.”
Choosing a Plan
The Internal Revenue Service recognizes several types of retirement savings plans [PDF]. The most basic one is a payroll deduction that doesn’t cost the business owner a dime: Employees simply choose what percentage of their paychecks, up to $5,500 in 2013, gets set aside for retirement. The employer ensures that the money gets deposited into the employee’s IRA, or Individual Retirement Arrangement. Employees who are more than 50 years old are allowed to make something called catch-up contributions of an additional $1000 a year in 2013. The company does not add or match the payroll deductions.
According to Woolston, diverting money into a retirement account is a disciplined way to save. “People make the decision to spend their after-tax assets quicker than they would retirement savings assets,” he says. “The retirement plan becomes more of a forced savings plan.”
The second type of retirement fund is a SEP, or Simplified Employee Pension Plan, which enables employers to contribute as much as 25 percent of an employee’s compensation, up to $51,000 in 2013, into an IRA. Like payroll deductions, SEPs require minimal paperwork to set up and minimal administration to maintain. SEPs are for employer contributions only, including the ones sole proprietors make to themselves. The business owner can decide year-to-year the size of these contributions or whether to make them at all.
The third option is a SIMPLE (Savings Incentive Match for Employees) IRA. This type of retirement savings plan combines employee payroll deductions and employer contributions. The employee selects what percentage of pay gets deposited into an IRA, a maximum of $12,000 in the 2013 tax year. Employees 50 years old and older are allowed to make catch-up payments of up to $2,500 in 2013. The employer can choose to make a yearly 100 percent match on the first 3 percent of an employee’s compensation, although that can be reduced to as little as 1 percent in any two out of five years. Instead of matching, an employer can opt to instead make across-the-board contributions of 2 percent of the compensation of every eligible employee into individual retirement accounts. SIMPLE plans may be administered in-house or with the help of an investment firm.
Employers also have the option of setting up a traditional 401(k) plan for employees to defer their pre-tax earnings. The employer may elect to match those contributions or not. Because of compliance issues, a 401(k) plan is usually best administered by financial professionals who typically charge a fee.
Giving yourself and your employees a way to save for retirement doesn’t have to break the bank — and it’s a good idea to invest in the future. What’s more, if you opt to make contributions, you will be able to deduct them at tax time.
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