2015-06-03 00:00:35TaxesEnglishIf you want to be prepared for your retirement, you probably need to contribute to a retirement plan as you run your business.|If you want...https://quickbooks.intuit.com/r/us_qrc/uploads/2015/06/istock_000034334226_small.jpghttps://quickbooks.intuit.com/r/taxes/the-best-retirement-plans-for-entrepreneurs/The Best Retirement Plans for Entrepreneurs|The Best Retirement Plans for Entrepreneurs

The Best Retirement Plans for Entrepreneurs

3 min read

If you want to be prepared for your retirement, you probably need to contribute to a retirement plan as you run your business. There’s always the option of stashing away cash in a traditional IRA or a Roth IRA. However, there are a handful of retirement plans that work especially well for small-business owners. Solo 401(k)s can work well for super savers, while SEP IRAs are a straightforward retirement vehicle with relatively high limits. If you also want to contribute on behalf of your employees, a SIMPLE IRA offers flexibility.

Here’s a rundown on these three options.

SEP IRA

How it works: As an employer, you can contribute $53,000 for 2015 or 25 percent of your compensation — whichever is less — as a business tax deduction to a Simplified Employee Pension (SEP) IRA. Investment earnings grow tax free.

Pros:

  • There’s no IRS reporting for SEP IRAs, setup is easy, and there’s no annual funding requirements.
  • You can establish the plan and make contributions as late as April 15 of the next tax year. By contrast, the deadline is December 31 for solo 401(k) plans.
  • You can contribute to both a SEP IRA and an employer-sponsored retirement plan.

Cons:

  • You may be required to contribute for employees. Fidelity’s SEP IRA, like others, requires that each eligible employee receive the same contribution percentage of compensation.
  • If your compensation is less than $212,000, you could get a higher contribution limit with a solo 401(k).
  • Doesn’t allow catchup contributions for employees over 50.

Bottom line: SEP IRAs are great for moonlighters who still want to contribute to another plan. They’re also a good option for freelancers without employees who want a no-fuss plan, and they’re best for individuals who don’t want to contribute more than 25 percent of their income toward retirement.

Solo 401(k)

How it works: For 2015, you can make up to $18,000 in tax-deferred contributions as an employee, plus contribute up to 25 percent as an employer. Your total contribution cannot exceed $53,000 in the year.

Pros:

  • Some brokers, like Vanguard, offer a Roth 401(k) option that allows you to use post-tax instead of pretax dollars to fund the plan.
  • Solo 401(k)s allow for catch up contributions, meaning you can contribute $24,000 instead of $18,000 if you’re over 50.
  • Spouses can also contribute.

Cons:

  • Business owners with employees are not eligible. If you take on employees, you’ll have to convert the plan to a group 401(k).
  • Once the plan has more than $250,000 in it, you must file an annual Form 5500 with the IRS.
  • Compared to a SEP IRA, account setup and contribution timing rules are more complex. Maintenance fees can also be more expensive.

Bottom line: It’s the best option if you want to stash away a large percentage of your income, as long as you don’t mind dedicating a little more time and money to setup and maintenance.

SIMPLE IRA

How it works: For 2015, employees can contribute up to $12,500 tax-deferred. Employers can match up to 3 percent of employee salaries.

Pros:

  • No annual Form 5500 is required.
  • There’s no minimum contribution for employees.
  • Unlike the SEP IRA, you can customize contributions for different employees.
  • Allows for catch up contributions, so employees over 50 can contribute $15,500 a year rather than $12,500.

Cons:

  • As an employer, you must offer a minimum match or contribution to employees. It’s customary to offer a 3 percent match, although you can dip down to as low as 1 percent for two out of any five years. Alternatively, you can contribute 2 percent of employee compensation for all eligible employees.
  • Plan must be established by October 1 of the tax year.
  • According to USAA, employer contributions must be made within 30 days of the employee contribution.
  • Limited to companies with less than 100 employees, which means you may need to upgrade plans down the road.

Bottom line: SIMPLE IRAs are a great way to fund employee retirement plans and offer flexible contributions and matching. But if don’t plan on taking on employees, you can probably snag a higher contribution limit (and endure fewer rules) with a SEP IRA.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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