Retirement Plans Options for Small Businesses
This post was last updated on October 18th, 2019
As a small business owner, making plans for your employee’s retirement is essential. There are five major types of small business retirement plans that permit pre-tax contributions each year from employers and employees. Once you have chosen your preferred plan, choose a reliable 401k provider to do the necessary arrangements.
Here are the plans considered as some of the best 401k plans for small business. Let us explore these types of small business retirement plans.
1. Solo 401k plan
The solo 401k plan is undoubtedly one of the best 401k plans for small businesses. This plan applies to self-employed small business owners who want to invest in other assets such as real estate, or those who may hire employees later on. As the name implies, it applies to one participant, and the contributions cannot exceed $53,000.
A good thing about Solo 401k is that contributions can be maximized if your income is low. Solo 401k plan is similar to the Traditional 401k plan (which will be discussed later in the article). They have the same contribution limits with almost no administration fee.
2. Simplified Employee Pension Plan – SEP IRA
This plan is applicable to small business owners with less than 3-5 employees. Self-employed individuals who are interested in opening a personal retirement account, and possibly for their spouses as well, are advised to go with the SEP-IRA plan. It is one of the easiest options.
With SEP IRA, you can contribute up to $56,000 or 25% of your annual compensation. Plus, the SEP-IRA plan does not have a minimum contribution requirement. However, the requirements may change annually.
401k providers for small businesses will recommend SEP IRAs for business with a small number of employees but not for those with more than 5-8 employees. They are great for small business owners with no employees, are working full-time and earning an average annual income of over $75,000.
3. Savings Incentive Match Plan for Employees (SIMPLE IRA)
This plan is a good option for small businesses whose number of employees is below 100. It allows employers and employees to make tax-deductible contributions. Like the SEP-IRA plan, it is one of the most comfortable retirement plans to start with.
There are no IRS filing requirements or minimal service costs. The maximum contribution limit is $26,000, and employers can contribute $7,000-$26,000 annually.
4. Traditional 401k plan
Traditional 401k plans are the most common type of qualified retirement plan. With this plan, employees are allowed to contribute up to $56,000 annually through salary deferrals, profit-sharing, and employer matching. However, it is not compulsory for them to profit-share or match.
This plan is best for employers with more than eight employees. However, the traditional 401k plan has the highest administrative fee.
5. Defined Benefit Plan
Among the number of retirement plans in the U.S., the defined benefit plan is probably the best. This plan provides a benefit that is attached to salary and tenure for retiring employees. The employer carries the burden of investment risk alone. The typical participants for this plan are doctors, consultants in partnerships, or other small entities.
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