Are You Self Employed?
The good news is that small business owners have a wide variety of savings plans available to them.
The benefit is tax savings for the business, generating and instant return for the owner and a benefit for their employees.
It is also important to understand that all of the plans below can be transferred tax free into an IRA if the employee separates from the business.
Below are some of the options available.
This is a good program for a self employed consultant or a sales person.
Contributions as much as 20-25% of earnings.
The business owner must contribute the same percentage of income for each employee as they do for themselves.
Maximum contribution may currently exceed $50,000.
The plan can be established up until the time of tax filing….including extensions – October of the following year.
There is a 10% IRS tax penalty on withdrawals before age 59 1/2. Minimum distributions required at 70 1/2. All withdrawals are taxable at the individuals tax rate.
(Savings Incentive Match Plan for Employees) SIMPLE IRA.
Must be set up no later than October of the current tax year.
2019 the maximum contribution is approximately $13,000 with a $3,000 to “catch up” for those over 50 years old.
There is a 25% penalty if money is withdrawn within 2 years of opening the plan. After that it is only 10% early withdrawal penalty up till age 59 1/2. Mandatory withdrawals at 70.5 and all taxed as income.
The employer contributes a small match dictated by the IRS.
It is an easy plan to set up with virtually no costs and easy to administer on an annual basis.
For the sole owner with no employees this is plan allows for maximum contributions.
Maximum is 100% of income up to $19,000 (in tax year 1999) Plus a percentage similar to that outlined under a SEP
The sole 401k allows a sole proprietor to put away more money with a lower income than a SEP. This is because the first part of the contribution can be based on 100% of income – not just a percentage of earnings
Unlike a traditional 401k the sole 401k has no set up expense and is set up via a standard application. It can be a great benefit for an older sole proprietor that has good earnings and wants maximum tax benefits!
If the business has a number of employees that are able to put away more money than they would in a SIMPLE plan or if the owner of the business would like to maximize their contributions, a 401k would be a great option.
401k plans are a bit more complex. They may also have set up and annual administrative expenses. These are well worthwhile for tax benefits, employee benefits and the growth opportunity.
Contributions are generally made by the employee. Employer may match but may not be required to. These details would be to be discussed with the plan provider or the actuary that designs the plan for the company.
Defined Benefit Plan
The high earning individual with no employees could sock away over $200,000 per year into their own defined benefit plan.
A defined benefit plan is designed by an actuary based on the business owners income, age, anticipated retirement date and required income at retirement.
There are costs to set up the plan. A fair guesstimate would be $2,500 or more for an actuary and plan design. Also fees each year for IRS reporting etc.
For the amount of contribution the tax savings would be significant and the fees would be worth it.
There are a number of ways to design a retirement plan based on your own personal situation for the small business person.
This is done via an actuary. On hybrid and defined benefit plans it is better to have an independent actuary design the plan and have a separate firm handle the investment account.
Doing it this way can appear to be more costly but it could be much more costly to have the fees buried within the investments and based on the entire value of the account. For small firms with solid earnings a hybrid plan is worth looking into.
Contact Us for a Free Consultation!
Meet with us for a free consultation to determine your needs, objectives and risk tolerance.