Reap the tax benefits of a qualified small business retirement plan
Establishing an employer-sponsored retirement plan is an attractive way to save for your own retirement and help your employees do the same. As a plus, your business may enjoy tax advantages for setting one up.
Not too late
The good news is that it may not be too late to set up and fund a retirement plan for 2017. While a 401(k) or other plan may be of interest, some businesses are dissuaded by the paperwork and oversight involved. Here are three popular small business retirement plans that may be more palatable:
- Simplified Employee Pension (SEP). This plan was designed with small businesses and self-employed individuals in mind, although other entities also are eligible. With a SEP, your business makes tax-deductible contributions for you and your employees. Employees can’t contribute to their own SEPs; all SEP contributions are made by the business.
SEPs feature relatively high annual contribution limits — the lesser of $54,000 or 25% of salary (20% of allowable self-employment income) for 2017. While you must contribute the same percentage of compensation to all SEP accounts, you have the flexibility to change this percentage every year.
- Savings Incentive Match Plan for Employees (SIMPLE) IRA. This plan is similar to a SEP but there are a couple of key differences. First, eligible employees may contribute to their accounts themselves. And second, the annual contribution limits are lower: Up to $12,500 can be contributed to each employee’s account in 2017, or up to $15,500 for employees age 50 or over. There is also a required match from the employer.
Generally, the employer chooses between:Matching contributions of up to 3% of an employee’s compensation, or
Nonelective contributions of 2% of an eligible employee’s compensation.
Most businesses (including self-employed individuals) with up to 100 employees are allowed to establish a SIMPLE IRA. The business’s contributions are tax-deductible and employee contributions are made on a pretax basis. Thus, the payment of taxes is deferred until distributions begin.
You may decide to opt for a SIMPLE 401(k) plan. Although similar to the SIMPLE IRA regarding contribution limits and employer matching, participants in a SIMPLE 401(k) plan may take out loans, which may make this type of plan preferable. Under either of the SIMPLE offerings, employers avoid the nondiscrimination tests, a key component of regular 401(k) plans. (The test, which involves a calculation based on the organization’s employees, may serve to restrict the allowable contributions of higher-earning employees unless there’s a sufficient level of participation by those earning less.)
- Safe Harbor 401(k). This plan enables small businesses to reap the same advantages that large companies have typically enjoyed with 401(k) plans, while relaxing much of the costly recordkeeping. And, as with the SIMPLE IRA and SIMPLE 401(k) plans, this plan eliminates the nondiscrimination rules. The contribution limits are the same as the regular 401(k)s: $18,000 plus a $6,000 catch-up for those age 50 and above. For that reason, the safe-harbor 401(k) is often preferable to its SIMPLE cousin with the lower contribution limit.
For each of these plans, your business has until the due date of your 2017 tax return (including extensions) to make contributions for tax year 2017. For plans that allow employees to contribute, their deadline is December 31, 2017. Different deadlines for setting up the plans apply.
Contact your tax advisor to discuss the particulars of these and other small business retirement plans in more detail.
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