GOLDEN VALLEY, Minn. - As if saving for retirement wasn't hard enough already, small business owners have the extra burden of having to set up their own retirement plans.
With different costs, advantages, and tax consequences to sort out - on top of the business you're trying to run - setting up a self-employed retirement account can be tricky.
Dan Ament joined KARE-11 Sunrise this morning to talk about some saving options for business owners.
Individual 401K: The individual 401K, works similarly to a 401K at a large company - and you can select between a Roth or a traditional plan. The individual plan is only available for individual business owners and their spouses.
Pros: This plan is flexible. There are no forced contributions, and sole proprietors can put away more money than they can with the SIMPLE IRA and often more than with the SEP IRA. Business owners can take out a loan from this plan.
Cons: The individual 401K is more costly. They're also more difficult to open and administer than some other options.
Best for: A solo businessperson who wants a higher cap for saving.
SEP IRA: The Simplified Employee Pension (SEP) is basically a pension plan funded by the employer using a simple formula for contributions. Employers of any size are eligible for this plan.
Pros: The SEP is easy and inexpensive to start and administer. It also has higher contribution limits than the SIMPLE IRA, and contribution amounts can vary each year, which allows for more flexibility. The SEP also requires no annual government reports.
Cons: The sole responsibility of funding the SEP IRA falls on the employer, so if you have employees, you, as the employer, must contribute the same percentage of compensation for them as you do for yourself. Most people can save more with an individual 401K than with a SEP IRA. There's no allowance for catch-up contributions. And you cannot take out a loan from this plan.
Best for: A one-person business or one with very few employees.
SIMPLE IRA: The Savings Incentive Match Plan for Employees (SIMPLE) is a tax-deferred retirement savings plan for small businesses that the employer must contribute to.
Pros: The plan is inexpensive to open and run and easy to start. It's also easy to administer and requires no annual government reports.
Cons: Contribution limits are low relative to other options. Employer contribution levels are relatively inflexible. Plus participants cannot borrow against their accounts, like they can with a traditional 401K.
Best for: It's a simple plan for very small businesses that don't want to contribute a lot and don't want to take out a loan from the plan.
Defined Benefit Plans: The defined benefit plan is similar to a traditional pension with benefits calculated using a formula that includes age, income, target benefit and more. Like a SEP IRA, this plan is funded solely by the employer, but contributions to a defined benefit plan are determined by a complicated formula, which often results in much higher contribution limits than with the SEP IRA.
Pros: The defined benefit plan allows employers to save a much more money than any of the three other plans.
Cons: This plan is very complicated to open and operate, requiring an actuary, who will likely charge fees of more than $1,000, to determine contributions. The contributions to the plan are mandatory.
Best for: High-income business owners with the time and resources to set up and administer this complicated plan-and who want to put away a very significant amount of money.
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