Small Business Retirement Plans
1. 401(k) – This plan is for any type of private or public company. It is generally most appropriate for companies with 20 or more employees. It’s key advantages are a wide range of mutual fund options as well as flexibility in the plan design. Employers may make a matching contribution or profit sharing contribution up to 25% of compensation with a maximum of $53,000 per individual. IRS Form 5500 and special IRS testing is made to ensure the plan does not favor highly compensation employees. Loans may be available as well as hardship withdrawals.
2. SEP IRA – This plan is used for the self-employed individual or small business owner to include those with employees. It is available for sole proprietors, Partnerships, S-Corporations and C-Corporations. There are a wide range of investment choices, it is easy to set up and maintain and there are flexible annual funding requirements. It is funded exclusively by employer contributions. Employer contributions are limited to 25% of compensation up to a maximum of $53,000. There are no employer tax filings and you can withdraw at any time but a 10% penalty applies if you are under 591/2.
3. Simple IRA – This plan is for businesses with 100 or fewer employees as well as self-employed individuals. It is available for sole proprietors, Partnerships, S-Corporations and C-Corporations. The key advantages are a wide range of investment choices, salary deferral plan with less administration, and electronic funding with customized contribution allocation for each participant. Can be funded by employee deferrals and employer contributions. Up to $12,500 in salary deferrals and $15,500 for participants 50 and over. The employer may contribute up to 3% of compensation which can be reduced to 1% in any of the two out of five years or contribute 2% of each employee’s compensation up to $5,000. There are no employer tax filings; annual employee notifications of employers contributions must generally be made by November 1st. May withdraw at any time, but a 10% penalty may apply if taken before the age of 59 1/2. If the withdrawal is taken within the first two years of participation in the plan, that penalty increases to 25%.
5. Investment Only – This plan is for small businesses or self-employed individuals with an established retirement plan who want to significantly expand their range of investment options. Only plan trustees can request distributions from the account. The plan that is chosen determines the limits, who can contribute, and administrative responsibilities.
Note: Figures are for 2015 tax year.