Q: I started my own small business and I’d like to set up a retirement plan. What are my options and how do I decide which plan is best? Any help would be appreciated, thanks! – Sameer
A: There are a number of different retirement plans available for your small business that allow you to save money in a tax-efficient way. While some of the plans require time consuming administration, annual filing requirements and costly plan installation, there are two plans that are inexpensive and easy to establish: the SIMPLE IRA and SEP IRA.
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is designed for small businesses with 100 or fewer employees (it’s ok if you’re the only employee). You, as the employer, can save up to $11,500 per year through a SIMPLE IRA. Setting up the plan is as easy as a phone call to a brokerage house like TD Ameritrade and filling out a form or two online.
A SEP IRA (Simplified Employee Pension) lets you save money tax-deferred much like a SIMPLE IRA and it’s just as easy to set up. However, a SEP IRA lets you contribute up to 18.6% of your net profit up to $49,000 in 2009.
SEP IRA vs SIMPLE IRA
Let’s assume your net profit for 2009 is $50,000. In this scenario you could contribute up to $9,300 into your SEP IRA for 2009 ($50,000 x 18.6%). Compare this with a SIMPLE IRA, which would allow you to save $11,500. There’s a crossover point to determine which plan lets you save the most money. You will be able to save more money through a SIMPLE IRA if your net profit is $62,000 or below. If your net profit is greater than $62,000, you may want to consider a SEP IRA.
If you have employees or plan to hire in the upcoming year, the rules become more complicated because you may be required to contribute money on behalf of your employees. You should consult your CPA to make sure you understand these rules and see if they’re applicable to your business.
Remember that as a small business owner you need to have an “out plan” which comes in the form of retirement savings. When the time comes that you lose your ability to produce income, you need to make sure you have enough retirement savings to support your lifestyle.
Matthew Brandeburg, CFP® has six years of financial planning experience and runs his own business, Bridgeway Financial Group, LLC, based in Columbus, OH.