Small businesses are the backbone of the American economy. A 2012 study presented by the SBA (Small Business Administration) showed that small businesses make up 99.7 percent of U.S. employers, 63 percent of net new private-sector jobs, and 48.5 percent of private-sector employment. Women-owned small businesses accounted for 36 percent of small businesses, and approximately 75 percent of small businesses were sole proprietorship i.e. they didn’t have any employees.
The small business owner embodies the very spirit of independence, so it makes sense that small business ownership and investing would go hand in hand in the quest for independence, control and wealth building. However, many business owners are so focused on running their businesses, that they aren’t aware of or don’t take advantage of some of the perks available to them. I encourage you to meet with a financial advisor or tax consultant to optimize your investments as a small business owner. In the meantime, I’ve outlined below some of the investment plans and options available to small business owners and I urge you to invest like the boss that you are!
Three types of retirement plans that small-business owners might consider:
Simplified Employee Pension Plan (SEP IRA)
Savings Incentive Match Plan for Employees (SIMPLE IRA)
Self-Employed 401(k) plan
A side note: Don’t be intimidated by the names of these plans; they are designed to help business owners and other self-employed individuals save for retirement. The tax advantages can be a serious perk for your business if used properly.
The three plans each offer tax advantages and have many similarities, but there are also differences to consider. Some of the similarities between the plans are:
Employer contributions can be deducted as a business expense
Each plan allows contributions to grow tax-free. Taxes are deferred until withdrawal.
Expenses incurred while starting and maintaining the plan can make you eligible for a tax credit of up to $500. Restrictions apply to the type of expenses, in addition to other restrictions.
To highlight the differences and to summarize the basics of each plan, refer to the chart below (courtesy of Fidelity Investments).
Small-business retirement plans at a glance
Features
SEP IRA
Simple IRA
Self-Employed 401(k)
Who it’s for
· Self-employed individuals or small-business owner, including those with employees
· Sole proprietors, partnerships, corporations, S corporations
· Companies with 100 employees or fewer, that do not have any other retirement plan
· Sole proprietors, partnerships, corporations, S corporations
· Self-employed individuals or business owners with no employees other than a spouse (and no plans to add employees)
· Sole proprietors, partnerships, corporations, S corporations with no common law employees
Key Advantages
· Easy to set up and maintain
· No initial setup or annual maintenance fee
· Salary reduction plan with less administration
· Low-cost option of $25 per participant or $350 plan fee
· Generous contribution limits
· No initial setup or annual maintenance fee
Who contributes
· Employer only (employee may make traditional IRA contributions to the account)
· Employer and employee
· Employer and employee (assuming the employee is the business owner or spouse)
Contribution limits
· Employer contributes up to 25% of employee compensation or up to a maximum of $52,000 in 2014
· Employer must contribute the same percentage to employee accounts in years he or she contributes to his or her own account
· Employer can either match employee contributions dollar for dollar, up to 3% of compensation or $12,000 for 2014, or contribute 2% of each eligible employee’s compensation
· Employee contributes up to 100% of compensation through salary deferral, not to exceed $12,000 for 2014
· Catch-up contributions of up to $2,500 (2014) available for those age 50 or older
· Employer can contribute up to 25% of compensation, up to a maximum of $52,000 in 2014
· Employee (owner or spouse) can make salary deferral contributions of up to 100% of compensation, not to exceed $17,500 for 2014
· Catch-up contributions of up to $5,500 (2014) available for those age 50 or older
· Total of salary deferrals and profit-sharing contributions cannot exceed 100% of compensation or $52,000 in 2014 if under age 50, or $57,500 if age 50 or older
Administration
· No Form 5500 filing
· Employee notification of employer’s contribution, if made
· No Form 5500 filing
· Certain annual employee notifications
· Annual Form 5500 filing after plan assets exceed $250,000
Cost
· Depends on the brokerage firm
· Depends on the brokerage firm
· Depends on the brokerage firm
Vesting
· Immediate
· Immediate
· Immediate
Access to assets
· Withdrawals at any time, which are subject to current federal income taxes and possibly to a 10% penalty if the participant is under age 59½
· Withdrawals any time. If employee is under age 59½, withdrawals may be subject to a 25% penalty if taken within the first two years of beginning participation, and possibly to a 10% penalty if taken after that time period.
· Cannot take withdrawals from plan until a “trigger” event occurs, such as termination of service or plan termination. Withdrawals are subject to current federal income taxes and possibly to a 10% penalty if the participant is under 59½.
In conclusion, your small business drives the American economy and takes up most of your time, but don’t overlook your retirement planning or the many perks available to you as a small business owner.
Topics discussed
SEP IRA
SIMPLE IRA
Self-Employed 401(k)