Do you have a small-business retirement plan?
by Lori Cannon, FLT Columnist
If you’re a small-business owner, you’ve always got a lot to do: marketing your products or services, hiring employees, paying your bills, coping with competition — the list goes one and on. But there’s one task you may be overlooking: establishing your own retirement plan. And that’s not something you want to ignore — because, one day, you may want to trade in the title of “business owner” for that of “retiree.”
Fortunately, when choosing a retirement plan, you’ve got some good choices. Although the various plans have different requirements and contribution limits, they all offer tax-deferred earnings, which means your money has the potential to grow faster than if it were placed in a vehicle on which you paid taxes every year.
Here are some of the most popular retirement plans for small-business owners:
- Owner-only 401(k) — This plan, which is also known as an individual or “solo” 401(k), is available to self-employed individuals and business owners with no full-time employees other than themselves or a spouse. You may even be able to choose a Roth option for your 401(k), As the owner, you can contribute to your plan as both an employer and an employee; your total contribution limit for 2015 is $53,000, or $59,000 if you are 50 or older.
- SEP IRA — If you have just a few employees or are self-employed with no employees, you may want to consider a SEP IRA. You’ll fund the plan with tax-deductible contributions, and you must cover all eligible employees. (Employees themselves cannot contribute.) You can contribute up to 25 percent of compensation, up to $53,000 annually. (Contributions for a self-employed individual are limited to 25 percent of compensation minus one-half of self-employment taxes.) And you can fund your SEP IRA with many different types of investments. Plus, you can establish a SEP IRA for 2015 until April 15, 2016.
- Defined benefit plan — Pension plans, also known as defined benefit plans, are still around — and you can set one up for yourself if you are self-employed or own your own business. This plan has high contribution limits, which are determined by an actuarial calculation, and as is the case with other retirement plans, your contributions are typically tax-deductible.
- SIMPLE IRA — A SIMPLE IRA, as its name suggests, is easy to set up and maintain, and it can be a good plan if your business has fewer than 10 employees. Still, while a SIMPLE IRA may be advantageous for your employees, it’s less generous to you, as far as allowable contributions, than an owner-only 401(k), a SEP IRA or a defined benefit plan. For 2015, your annual contributions are generally limited to $12,500 or $15,500 if you’re 50 or older by the end of the year. You can also make a matching contribution of up to 3 percent of your compensation.
A SIMPLE IRA must be set up between Jan. 1 and Oct. 1 of any year, so if you’re interested in this plan, you may have to wait until 2016 to get started. But if you’d like to set up any of the other retirement plans we’ve looked at, don’t delay. The sooner you put your plan into place, the quicker it can start working for you to help you reach that day when you no longer have to work at all.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Lori Cannon is a financial advisor with Edward Jones. You may contact her at 419-842-0369.