As a small business owner, one of the greatest benefits you can provide to your employees is a way for them to save for their financial future. Offering a retirement plan is an important part of the total compensation package that helps you compete for and retain talented people. Keep in mind that employer contributions to a retirement plan are a deductible business expense.
As an employer, you have flexibility in choosing a plan or combination of plans that work for your business. Broad categories include:
Defined benefit plans
A defined benefit plan, such as a traditional pension plan, is something you could consider for your employees. The plan enables you to make annual contributions, which can be adjusted each year. Some plans feature the option to automatically increase annually, allowing you to reward employee loyalty. The plan pays out a specified benefit to retired employees.
Defined contribution plans
A defined contribution plan allows the employee, the employer or both to contribute to an individual account for the employee. A 401(k), the most common defined contribution plan, allows the employee and employer to make consistent, tax-deferred contributions. Participants choose investments which have the potential to grow tax-deferred. These plans allow annual contributions of up to $18,000 in 2015 and 2016, the ability to borrow from the plan to cover emergency needs, and “catch-up” contributions of an additional $6,000 a year for those age 50 and older. Employers have flexibility to establish vesting schedules or options such as a Roth 401(k), funded by after-tax contributions but with the potential to provide for tax-free withdrawals in retirement. Although just as with pre-tax contributions, a Roth 401(K) comes with required minimum distributions.
There are two types of individual retirement accounts (IRAs), which allow you to make tax-deferred contributions. One option, a Simplified Employee Pension (SEP) IRA, is one of the easiest and least costly plans to create. 100 percent of the contributions are made by the employer and are immediately vested for the employee. In 2015 and 2016, the maximum contribution can be 25 percent of an employee’s salary up to a total contribution of $53,000. It’s not possible to set up a Roth version or to offer loan provisions.
A SIMPLE IRA is a second option you can use if your business has less than 100 employees. Like a SEP, it’s easy to establish and administer, and the plan requires employers to match the employee’s contributions. In 2015 and 2016, the maximum contribution to a SIMPLE IRA for an individual is $12,500, with an additional $3,000 allowed for those age 50 and older.
Don’t forget about your own retirement
As a small business owner, it’s important to understand all of your options when it comes to saving for your retirement and helping your employees save for their financial future. While you may be hoping that the proceeds from the future sale of your business will provide for your retirement, you could be putting your future at risk if you’re not saving in another vehicle. A lot could happen between now and then that could affect the value of your business or your ability to sell it. Establishing a retirement plan may provide a more secure source of future retirement income. Consider working with a financial advisor who specializes in small business retirement plans. A professional can help you make the best choice for you, your employees and your business.
William “Drew” Watson CFP® is a Financial Advisor and Private Wealth Advisor with Ameriprise Financial Services, Inc. in Owensboro, KY. He specializes in fee-based financial planning and asset management strategies and has been in practice for 20 years. To contact us by phone, please call 270-684-8424, or mail to 111 West 3rd St., Owensboro, KY 42303. You may also visit our website at www.williamawatson.com.