The reality is that most small-business owners do not save a lot, as their wealth is often wrapped up in their business. They focus on putting the earnings back into the business to ensure growth. Once the business becomes profitable, small-business owners need to consider developing a retirement plan. A retirement plan encourages regular savings for the future and can be used to attract and retain talented employees, further ensuring your business’ success.
There are many different types of plans to choose from, and your choice of plan depends partly on how many employees you have, how much you want to save and how much the business is willing to contribute to your employees’ accounts.
If you are a sole proprietor with no employees, your options are greater since you do not have to worry about others when creating your plan. Typically, sole proprietors look to Simplified Employee Pensions or Individual 401(k) plans. In 2017, you can defer up to 25 percent of an employee’s compensation, or 20 percent for yourself if you are self-employed and contributing to your own SEP IRA, provided the amount does not exceed $54,000. The maximum contribution limit for Individual 401(k) plans is also $54,000, but this is a combination of employee salary deferral, up to $18,000 and the employer contribution. Furthermore, Individual 401(k)s allow individuals 50 or older to make a catch-up contribution of $6,000, bringing the total contribution to $60,000.
If you have employees, an Individual 401(k) is generally no longer an option. However, you can still offer a SEP IRA. There are nondiscrimination rules requiring that plan contributions not discriminate in favor of shareholders, officers or highly compensated employees. Typically, the nondiscrimination rules are satisfied by providing either an equal percentage of pay or a flat dollar amount for all participating employees. The drawback to a SEP IRA is that employees are fully vested once contributions are made, which — while good for the employee — does nothing to encourage employee retention.
You can offer your employees a traditional 401(k) plan, but this can be costly to administer, and there are very stringent rules as to how the business contributes on behalf of the employee. The benefit, how-ever, is that employer contributions can be subject to a vesting schedule where employees accrue non-forfeitable rights based on how long they work for the company.
For a plan that is easier to administer, a small business may want to consider a Savings Incentive Match Plan for Employees of Small Employers, better known as a SIMPLE IRA plan. Employees can defer up to $12,500 in 2017, while the business promises to match contributions dollar for dollar up to 3 percent of pay or make a non-elective contribution for all eligible employees equal to 2 percent of pay. With SIMPLE plans, employees are 100 percent vested once contributions are made.
Regardless of your choice of plan, it is vital that you work with an expert in small-business retirement plans. You should seek the advice of experts when it comes to controlling plan costs, developing a plan based on the demographics of your employees, and selecting the investment options for your plan to ensure that will fit your situation.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.