January 27, 2022

Small Business Advice

Retirement plans for small businesses

Gray Poehler | 12/1/2017

Q: I am self-employed and need to set up some kind of retirement plan. What options should I consider?

A: You are wise to begin now to prepare for your eventual retirement years. Statistics show that many Americans are woefully unprepared and depend almost entirely on Social Security benefits. In researching your question I came across an article by Fidelity Investments dated Jan. 1, 2017. The following are excerpts from that article.

Basically, there are four types of retirement plans that small business owners might consider:

  1. Simplified Employee Pension Plan (SEP IRA)
  2. Savings Incentive Match Plan for Employees (SIMPLE IRA)
  3. Self-Employed 401(k) plan
  4. 401(k) plan and other defined contribution plans like profit sharing plans (better for larger companies given setup costs, administration, fiduciary responsibilities, etc.)

Choosing the right plan takes careful consideration. This piece focuses on the SEP IRA. For details on the others, go to Fidelity's retirement plans for small business.

The SEP IRA is an ideal choice for the self-employed individual like yourself. It is easy to set up and maintain with no annual maintenance fees. You can make pre-tax contributions up to 25% of compensation, with a $54,000 maximum for 2017. See the IRS' retirement plans FAQs, here.

If you are self-employed, base your contribution on net profit minus one-half of the self-employment tax minus your SEP contribution. See IRS Publication 560 and the deduction worksheet for self-employed on determining the contribution amount. If you have employees who have attained age 21 and earned over $600, you must contribute the same percentages to their accounts.

Vesting is immediate and you may make withdrawals at any time. However, withdrawals are subject to current income taxes, and possibly a 10% penalty if you are under the age of 59-1/2. Unlike qualified plans, you may not borrow from the account.

SEP contributions are made to the separate IRAs for eligible employees. Each employee is responsible for establishing their own traditional IRA to receive employer contributions. Unlike employers with qualified plans, the employer of an SEP has no responsibility for providing assistance with investing plan contributions. Individual participants may select their own IRA provider and direct their investments.

As with many other employer plans, the employer has until the tax-filing deadline of the business (including extensions) to fund the SEP IRA. Individual employees may use their traditional IRAs to receive their SEP and traditional IRA contributions.

For the employer, tax reporting is limited to reporting SEP contributions on the business' tax return, or an individual return if a sole proprietorship. For individual participants, the IRA custodian or trustee reports SEP IRA contributions on IRS Form 5498 and distributions on IRS Form 1099-R. Employers and employees should bear in mind that the custodians report contributions in the year they are received.

While it may be convenient to establish the SEP, you should consult your tax professional to ensure that the plan you choose is suitable for your business profile.

The writer wishes to acknowledge contributions to this article by Mark R. Puccinelli, Sr., CLU, ChFC, of Financial Accounting Services Ltd. in Richmond, Va.

Gray Poehler is a volunteer with the Naples Chapter of SCORE.

A SCORE counselor since 2005, Gray Poehler owned and operated an independent insurance agency with 20 employees and two locations. He has earned the Certified Insurance Counselor designation and is familiar with both personal and commercial property and casualty insurance. Areas of expertise include: Business Finance and Accounting; Business Strategy and Planning; Business Operations; Human Resources and Internal Communications; Sales, Marketing and Public Relations.

To learn more about management issues of small businesses, contact the SCORE office nearest you.

Tags: Florida Small Business


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