Planning · February 04, 2021

How to Find the Best Retirement Plans for Small Businesses

As a small business owner, you have a lot on your shoulders. You want to keep your company growing and your employees happy while focusing on your financial future.


One way to do that is by offering a retirement plan. It can help you and your employees save for life after leaving the office.

However, finding the best retirement plans for small businesses isn't a one-size-fits-all question. Before you decide on a plan, you need to explore the options. Then, pick the plan that best fits you and your employees' needs. Here's what to consider as you start the process.

Why offering a retirement account matters

For many Americans, the income earned through Social Security won't be enough to last throughout retirement. A retirement account offers a way to help supplement your income once you stop working.

Many people are familiar with retirement accounts often offered by larger companies, such as 401(k)s. However, small business owners can help employees save for retirement by providing retirement plans, too. These plans can benefit both you and your employees in saving for potential long-term needs in retirement.

It's also smart business sense. Having a retirement plan is a benefit that can attract better employees to your business. Even if you're a sole proprietor or have a handful of employees, there are retirement plan options to meet your needs.

SEP IRA

If you're self-employed or have a few employees, a Simplified Employee Pension Individual Retirement Account, or SEP IRA, could be something to explore.

These plans are available for businesses of any size and typically have higher limits than traditional 401(k)s. The employer funds employees' IRAs through tax-deductible contributions. Meanwhile, all of the employer contributions must be the same percentage of income, up to 25%. Employees don't have to participate if they don't want to.

SEP IRAs are often relatively easy to administer and offer flexibility, as they let you change contribution levels each year. That can help if you have a year where cash flow is an issue—you aren't locked into contributions.

SIMPLE IRA

If you operate a larger business with up to around 100 employees, a SIMPLE IRA might be another option to explore. However, self-employed small business owners can use this option as well.

With SIMPLE IRAs, the employer and employees can both make contributions. However, employees must hit an earnings threshold set by the IRS over the previous two years to participate. Employee contributions are tax-deferred, and employer contributions can be set on a percentage of employee salary or a match to employee contributions.

In many cases, SIMPLE IRAs can be set up with electronic withdrawals directly from employee payroll deductions. This plan offers flexibility in terms of employer match options, too. You can adjust the percentages if needed.

401(k)

A 401(k) might be the retirement plan most people have heard of as they enter the workforce. The best 401(k) plan for small business owners depends on how many employees you have.

If you're self-employed, an individual 401(k), also called an i401(k), might be the best option. The tax advantages of this plan work just like a traditional 401(k). You make pretax contributions and any withdrawals get taxed at your income level. You can contribute both as an employee and an employer, but the IRS has set limits on both.

Another option for small business owners with more employees is a SIMPLE 401(k). It offers a more simplified version of a traditional 401(k) for businesses with no more than 100 employees who earned at least $5,000 in the previous year. Employees contribute pretax dollars, and employers must contribute to the plan if they offer it, usually through a match or a set percentage of employee compensation. If you choose to offer a SIMPLE 401(k), you can't provide any additional retirement plans for qualified employees.

A benefit for employees is that a SIMPLE 401(k) offers immediate vesting. For employers, it provides more flexibility and a lighter administrative load than a traditional 401(k).

A few key reminders

Once you begin to administer a retirement plan, it's up to you to make sure you're meeting all applicable regulations and laws. The IRS sets maximum contribution rates for both employees and employers each year, so be sure to check those.

The best retirement plans for small businesses can help you and your employees prepare for the future. Go through the options available to you and decide what makes the most sense for your needs.

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