Small Business Owners Need A Retirement Plan
News flash: most small business owners are not saving enough for retirement. A recent survey by the Small Business Administration found that only 36% have an IRA and fewer than 20% participate in a 401(k) plan. Now I’m sure there are a number of reasons for this, but I would bet the single largest factor is the perceived complexity and cost of setting up a retirement plan. The fact is that there are many choices out there, with varying degrees of complexity and a range of costs. But they all have several significant benefits in common.
Why Start a Retirement Plan?
Even if you are setting money aside today, you may be missing out on some significant tax advantages if you do not have a company plan. A properly structured retirement plan has several tax benefits, including the following:
- contributions the employer makes to the plan, whether for your account or for your employees’ accounts, are deductible from your income
- contributions made by an employee, in most cases, are not taxed until they are distributed to the employee in retirement
- taxes on interest, dividends and capital gains are deferred until savings are withdrawn in retirement
- tax credits may be available to offset the costs of starting a plan, depending on company size and the type of plan implemented
Small business retirement plans can also help with attraction and retention of high-quality employees. Those that do not offer employees an opportunity to save for retirement, in a tax-deferred program, with potential matching or profit-sharing contributions from the employer, may find themselves at a competitive disadvantage on the talent front.
What Are The Options?
Plans fall into three basic categories:
- IRA-Based Plans – The most common are the Payroll Deduction IRA, the Simplified Employee Pension (SEP) IRA and the SIMPLE IRA Plan. These plans are relatively easy to set up and maintain, with lower costs than many other retirement plan options, and they tend to be used by smaller employers.
- Defined Contribution (DC) Plans – Common forms of the DC plan are the 401(k) 403(b) and 457 plans. DC plans tend to be more complex than the IRA plans, and therefore more costly and burdensome to maintain. But for larger employers, the benefits for employees can more than offset the added complexity.
- Defined Benefit (DB) Plans – Often referred to as a pension, these plans are seen much more in the public sector and at larger, well-established companies. DB plans promise a specified return to participants regardless of actual market results, so the employer bears much more risk than with the other types of plans. Very few small business owners implement DB plans.
How Can I Get Started?
Sound retirement planning is important for everyone, including (and perhaps especially) the small business owner. With a company retirement plan, a business owner can save for the future while helping his employees do the same, and bringing significant tax advantages to them and the company. And chances are the setup process, costs, and ongoing administration will be less burdensome than they think.