With the S&P 500 at fresh all-time highs, and our economy getting back to a perceived normal (let’s be honest, who knows), there is a lot of talk about small business retirement plans.  Nobody wants to miss out, and people appear to feel better about long-term investing again.  As a small business owner, you may have some questions on setting up a retirement plan.  Hopefully, this article can help.  We will go through the pros and cons of each of these three plans….

401k:  This seems to be the most talked about option out there.  It has the most flexibility, loan capabilities, and potentially a Roth provision. 

The flexibility comes with the fact that you can give your employees a match if desired.  That can be a great thing for company moral and employee retention.  You will also have the ability to create vesting schedules if desired to give talent a reason to stay at your company.  If you don’t want to give your employees a match, you don’t have to do so.  That is the benefit of the flexibility of this plan.

Another benefit is that you can take out a loan against your retirement.  That may or may not be a good idea, but it is a possibility.  You will have to pay it back within 5 years, and you have to pay it back if you no longer are employed or own the company.

The final potential benefit is that you can create a Roth 401k.  Going the Roth route may be helpful in your retirement planning.  It gives you the ability to put money into the plan after tax, and collect any gains tax free upon turning 59 ½.  You will ultimately have the choice as to weather to use pre or post tax dollars, and that is a choice that only the 401k can offer (in regard to a business retirement plan).

Now, with all of those good things that were just said, what about the bad stuff?  Well, there are two main things that come to mind when thinking about a 401k.  The first is that there are a lot of legal issues that need to be dealt with as the owner of the business (shameless plug, we help with all of those and make it very easy).  The second is that the fees associated with a 401k are typically higher than those with the other two types of plans mentioned.  However, they are typically not unreasonable.

Let’s talk about a Simple IRA.  The main advantage that I think it has it that it is well…simple.  You can put in pre-tax dollars (although the limits are lower than a 401k), and money can grow tax deferred (like a traditional 401k).  There is a lot of flexibility in what can be invested.  It can be done through a brokerage account and look very similar to an IRA.  Fees are typically very reasonable.  In regard to employees, you can either set up a match at 3% or you can simply put in 2% to each employee’s account.  It is your choice as an owner.

Finally, there is a SEP.  A SEP is ideal for a business that has an owner that wants to put away money tax deferred and still contribute the same percentage for his employees.  The limit is 25% (up to $58,000) For example, if an employer made $100,000, he can contribute $25,000 to his SEP tax deferred.  The caveat with this is that he must contribute the same percentage for all of his employees.  So, if his payroll is $400,000 to his employees, he would then have to contribute $100,000 (total) to the SEP accounts for his employees.  This is typically something that is done with owners that have no employees or owners that have lower wage employees.

If you have any questions on which plan is right for you, feel free to email me at mtosaw@stcharleswealth.com.