Published on February 3, 2014
How to choose a retirement account For Your Business
Choose The right retirement account for you and your employees in order to provide tax savings, attract the best employees, and provide a valuable benefit for yourself and your employees.
types of accounts available for businesses:
SIMPLE IRA (Savings Incentive Match Plan for Employees) A SIMPLE IRA is perfect for a small business starting out, and allows for both employee and employer contributions. SIMPLE IRA’s are available to any small business with 100 or fewer employees.
SIMPLE IRA (Savings Incentive Match Plan for Employees) Contributions are mandatory for all employees who have received at least $5,000 in compensation during any 2 preceding calendar years, and are expected to receive at least $5,000 in compensation in the current calendar year.
SIMPLE IRA (Savings Incentive Match Plan for Employees) Who contributes: Both employer and employee. Contributions are mandatory for employer, but elective for employee.
SIMPLE IRA (Savings Incentive Match Plan for Employees) Limits: The employee contribution cannot exceed $12,000 for 2013, and 2014. All employees aged 50 or over are also allowed a $2,500 catch up contribution.
SIMPLE IRA (Savings Incentive Match Plan for Employees) Filing Requirements: No annual filing requirement with IRS
SIMPLE IRA (Savings Incentive Match Plan for Employees) Advantage: Easy to set up and maintain.
Payroll deduction (IRA, Roth or Traditional) Summary: Under this plan, employees establish an IRA with a financial institution, and start a payroll deduction for it. A traditional IRA is tax-deferred, while a Roth IRA is usually taxable in the year contributions are made.
Payroll deduction (IRA, Roth or Traditional) Who contributes: Employees only.
Payroll deduction (IRA, Roth or Traditional) Limits: Maximum amount for Traditional IRA is $5,500 for 2013, and additional $1,500 for employees 50+, or employee’s taxable contribution for the year.
Payroll deduction (IRA, Roth or Traditional) Limits: Maximum amount for Traditional IRA is $5,500 for 2013, and additional $1,500 for employees 50+, or employee’s taxable contribution for the year. Roth IRA limits are based on Modified Adjusted Gross Income (AGI), and may be reduced under certain circumstances and filing statuses.
Payroll deduction (IRA, Roth or Traditional) Reporting Requirements: No filling requirements with the IRS
Payroll deduction (IRA, Roth or Traditional) Advantages: Easiest of all retirement programs to set up, with little or no administrative cost.
SEP (Simplified Employee Plan) Summary: This plan is funded solely by employer contributions. The employer must give the same percentage to all employees, but this percentage amount can vary from year to year. This amount is based only on the first $255,000 ($260,000 for 2014) of their compensation.
SEP (Simplified Employee Plan) Who Contributes: Employer Only
SEP (Simplified Employee Plan) Limits: Employer contributions to each employee’s SEP IRA for the year cannot exceed the lesser of 25% of compensation or $51,000 ($52,000 for 2014). The maximum deduction you can take is 25% of all participants’ compensation up to $250,000.
SEP (Simplified Employee Plan) Reporting Requirements: No annual filing requirements with the IRS.
SEP (Simplified Employee Plan) Advantages: Amount the employer contributes can change yearly, and the employer does not have to participate every year. Contributions to a SEP are tax deductible, and investment earnings are not taxed. A tax credit of up to $500 per year is allowed for each of the first 3 years of starting up the plan.
SEP (Simplified Employee Plan) Disadvantages: No participant loans are permitted. Total contributions to each employee’s SEP-IRA are limited.
401 (K) Summary: There are several types of 401(k) plans: • Traditional • Safe Harbor • Automatic • SIMPLE 401(k)
401 (K) Summary: There is no limit to the number of employees with most 401(k) plans, other than the SIMPLE 401(k) which is limited to 100 employees or fewer.
401 (K) Summary: There is no limit to the number of employees with most 401(k) plans, other than the SIMPLE 401(k) which is limited to 100 employees or fewer. All employees 21 and over who have worked at least 1,000 hours in any year must be offered this plan.
401 (K) Who contributes: Employer and employees
401 (K) Limits: The combined amount of employee and employer contributions is limited to 100% of compensation, or $51,000 (for 2013) and $52,000 for 2014. Employees can defer up to $17,500 (for 2013 and 2014).
401 (K) Limits: Traditional 401 (k) plans- These plans allow eligible employees to make deferrals through payroll deductions, and employers have the option of making contribution on behalf of all employees, matching contributions, or both. Safe Harbor - This plan is similar to the Traditional 401 (k), but requires immediate vesting of all contributions. A Safe Harbor 4401(k) plan is not subject to complex annual non-discrimination tests that is required of the Traditional 401(k)
401 (K) Limits: Automatic Enrollment - The employer contributes a fixed percentage or amount to all employees enrolled unless they opt out. This type of plan helps to pass or avoid non-discrimination testing. SIMPLE 401(k) plan - Employer is required to make contributions that are fully vested, and is available to employers with 100 or fewer employees who received at least $5,000 in compensation in the previous calendar year.
401 (K) Reporting Requirements: Form 5500 must be filed annually with the IRS
401 (K) Advantages: All 401(k) plans permit high level of salary deferral, each employee can set their own level of contribution, and employer contributions are deductible up to limitation amount. In addition, these plans include flexible contributions and features, such as participant loans, hardship distributions and a designated Roth Account.
401 (K) Disadvantages: Most complicated of all retirement plans. Several types of 401(k) plans require annual IRS testing to ensure non-discrimination.
References • IRS Webcast on Retirement Plans • Payroll Deductions for Small Business, Publication 4587 • www.irs.gov/retirement • Publication 4674 - Automatic Enrollment 401 (k) Plans for Small Businesses • Publication 560 Retirement Plans for Small Businesses
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