Whether you are an individual worker looking over retirement plans offered by your employer, or a small business owner considering the choices you will present to your own employees, a solid retirement plan is key. Giving your employees options to help them save for retirement adds value to your company and shows you care about your workers.
As an employee, taking advantage of the retirement plan options offered to you is a great way to get a head start on planning for retirement, with some help from your current employer. As an experienced tax accountant for small business owners and individual employees, I always encourage clients to offer and enroll in retirement plans that allows them to reap the benefits of a tax deduction. Here is an overview of the three most common retirement plans offered by businesses so you can figure out which one is right for you.
Simplified Employer Plan (SEP) IRA
A SEP IRA can be started and funded after the end of the tax year, making it a unique retirement plan. If your small business only has a few employees and you obtain a hefty salary as the owner, this may be the best plan to offer. An employee who has an established SEP IRA but withdraws money before turning 59 ½ years of age will be subjected to a 10% tax on the withdrawal. For 2016, the maximum limit of contribution for a SEP IRA was $53,000 for the year. As a business owner, you are responsible for contributing the same percentage to all your eligible employees as what you contribute to your own.
If you work for a large company with 50 employees or more, your employer may be offering a 401(k) as a retirement plan for workers. If you are over the age of 50, your annual contribution to this retirement plan needs to be $24,000 or less, and $18,000 or less if you are younger than 50 years of age. A 10% tax is charged if you take money out from your 401(k) before the age of 59 ½. Some companies may offer 401(k) contributions by matching the amount of funds an employee puts into the account.
For business owners, 401(k) retirement plans cost more in setup and maintenance fees due to the annual filing requirement associated with this retirement plan. Furthermore, business owners are required to adhere to strict compliance testing to ensure that employees with lower salaries are still benefitting from the retirement plan.
A SIMPLE IRA must be established prior to October 1st for the year and can only be obtained for businesses with less than 100 employees. A SIMPLE IRA is a popular choice for business owners because it allows them to match contributions, which then encourages their employees to invest and become involved with the retirement plan. This company match is also tax deductible, so it is an incentive for the business owner as well. While employers cannot contribute as much with a SIMPLE IRA, it is still a common option due its flexibility. With a SIMPLE IRA, the business owner can contribute the maximum allowed each year, no matter how many employees participate in the retirement plan, and no matter how much these employees decide to contribute annually.
These three retirement options are the most common offered by small business owners and larger employers. Each retirement plan has benefits and drawbacks, including different tax deductions, for both employers and individual workers. Before you choose a retirement plan for you and your family, or your small business and employees, call our experienced NYC tax and accounting firm so we can help you select the most beneficial retirement solution.