Whether you are starting a new business, or have owned your business for many years you will face the question of how to best save for your retirement. There are many options, many factors which will determine the plan you use.
If you are the only employee/participant and plan to invest less than $6,500 annually, a low-cost way to begin may be to establish an individual Roth or Traditional IRA account. There is generally a one-time setup fee and an annual maintenance charge from the account custodian, in addition to fees associated with the account investments.
Depending upon your income level and tax filing status, you may be eligible to contribute to a Roth IRA, a Traditional IRA, or either/both (total contributions not to exceed $5,500/$6,500 if age 50 or over). Your tax advisor can help you to decide which type of account would be most beneficial to you given your current situation.
If you intend to contribute a larger amount of money, or if you have employees and would like to offer a retirement plan, you may consider a SEP IRA, a SIMPLE IRA, or even a 401(k) plan. Your choice of plan will depend upon how much you wish to contribute, the cost of the plan and the reporting requirements involved.
Any employer may set up a SEP IRA; to be eligible to participate, one must have been employed in 3 of the last 5 years, be at least 21 years of age, and have earned at least $600. All eligible employees must be included in the plan. Employer contributions are made at the discretion of the employer, and maximum allowed total contributions (employee and employer) will be the lesser of 25% of compensation or $53,000.
A SIMPLE IRA may be appropriate for an employer with fewer than 100 employees. Eligible employees will have earned at least $5,000 in the prior 2 years and are expected to earn at least $5,000 in the current year. Again, all eligible employees must be included in the plan. The contribution limits for participants are $12,500 with a $3,000 “catch up” contribution for those age 50 or older. Employers may make a matching contribution of up to 3% of compensation.
Any employer (other than government entities) may establish a 401(k). Any employee who is at least 21 years old, and has completed a year of service may participate. A 401(k) plan requires annual filings of Form 5500 and notices for safe-harbor contributions; there may also be requirements for a QDIA, automatic enrollment, and other features as applicable. A 401(k) plan requires the services of a TPA (Third Party Administrator) for these filings and reporting, which adds additional expense to the Plan. Contribution limits are higher (participants may contribute up to $18,000 annually – with an additional $6,000 catch up contribution if over age 50). The maximum contribution currently is the lesser of 100% of compensation, or $53,000 ($59,000 with the “catch up” contribution included).
It is important to meet with your tax advisor and your financial advisor before starting a retirement plan, to choose the plan most appropriate for your business. An annual review of your plan is also necessary to keep up with changes in contribution limits and other plan updates.
**Securities and investment advice offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC Marathon Financial Advisors, Inc. and Cadaret, Grant & Co., Inc. are separate entities.