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In some states, it is mandatory for a small business to establish a retirement plan for its employees. California, Colorado, Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Vermont, Virginia, and Washington. Clearly, if your business started and operates in one of these states, it is crucial to establish a retirement plan. As a small business owner, establishing a retirement plan which is a great fit for you requires you to evaluate the different options. Let’s take a look at some of the most common choices and how they might fit your needs.
1) SEP IRA (Simplified Employee Pension Individual Retirement Account)- Primarily used for business owners who are self employed. Contributions are tax deductible. The maximum contribution for an employer to an SEP-IRA in 2023 is $66,000 or 25% of net income, whichever is lower. Eligibility requirements are based on time employed. Contributions are not mandatory each year but if made, are required for all employees. For more specifics, take a look- Is a Simplified Employee Pension (SEP) IRA Tax Deductible? (investopedia.com)
2) SIMPLE IRA (Savings Incentive Match Plan for Employees)- Established by businesses with 100 employees or less. Easy set up for employers, you fill out the form, pay the fee, and you are ready to go. The maximum contribution to this plan for employees younger than 50 is %15, 500. For employees older than 50, it is $19,000. Contributions are tax deductible. Employers, however, are required to make annual contributions. Employers must provide a 100% match up to 3% of employees contributions or provide 2% of their annual salary.
3) 401K- There are three types of 401k plans for small business owners: Solo 401k, simple 401k, and traditional 401
- Solo 401k plans are primarily for self employed individuals as they are both the employer and employee. The employee contribution maximum amount limit in 2024 is $23,000 and 25% of the employer income. The total contribution limit in 2024 is $69,000. The contributions are tax deferred.
- Simple 401K plans have lower employee contribution limits so they are ideal for small business employees which make less than $50,00 per year. The maximum amount an employee may contribute is $16,000 per year. Employers must match 3% of employee pay or a non elective fixed amount of 2% per employee. The total contribution limit for both employer and employee is $69,000. The contributions are tax deferred.
- Traditional 401k plans offer tax deferred contributions. Employees can contribute up to $23,000 in 2024, and an additional $ 7,500 if the employee is over 50. The total contribution limit in 2024 is $69,000. Employers can tack on a cash balance plan to a traditional 401k plan and save much more for retirement.
All of the startup costs for creating a retirement plan are eligible for up to $5,000 of tax credits for three years. Offering a match and auto enrollment also add tax credits for businesses creating a retirement plan. Very simply, if you are a business owner and looking for a great way to improve your tax situation, as well as save for retirement, these are great options. Let’s have a conversation about how we can help do that for you!
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