Small Business Retirement Plans Comparison
There are several options when it comes to small business retirement plans, and each of these must be compared and evaluated before you can determine which plan is best for your specific business and employee needs. There are 401ks, SEP IRAs, Solo and individual 401ks, SIMPLE IRAs, Roth IRAs, Profit Sharing plans, defined benefit plans, pensions, and other options. The first comparison that should be made with retirement plans for small business is the administrative costs for the plan. IRA options are usually low cost in this area, and so are SIMPLE and Solo 401k plans. Traditional 401k plans can have high administrative costs, and this is also true of money purchase plans, defined benefit retirement plans for small business, and profit sharing plans. Administrative costs are just one of the important factors that need to be considered and compared though, and there are many others.
Comparing small business retirement plans means examining the income limits, contribution limits, and tax consequences of each specific plan type. Some plans allow for salary deferred contributions while others do not. Each plan will have a maximum allowable contribution amount, and this amount can vary significantly. The 401k contribution limits for salary deferrals can be from $11,500 to $17,000, depending on the specific 401k plan used, and these plans do allow for catch up contributions that are salary deferred. The maximum contribution an employee can make per year to these plans can be different for different types of 401k plans. Money purchase, profit sharing, and defined benefit retirement plans do not allow for salary deferral contributions.
Small business retirement plans may have certain requirements concerning age and number of employees or individuals covered. A SIMPLE IRA plan does not have any age requirements in place but most other plans can exclude any employees who have not yet reached 21 years old. A SIMPLE IRA or SIMPLE 401k can not be used if a business has more than 100 employees, but these may be ideal for self employed retirement plans because they are simple to set up and have a low complexity level. Profit sharing and defined benefit plans can be very complex and difficult to set up and manage, and this is true of money purchase plans and traditional 401k plans as well.
The perfect small business retirement plans may be different for each business and owner. The wide range of plans available ensure that there are options for every business regardless of size or retirement planning goals. A SEP IRA, SIMPLE IRA, and SIMPLE 401k plan are all considered easy and inexpensive choices for small businesses with employees. A solo 401k can work well for businesses that only have owners as employees. Traditional 401k, money purchase, profit sharing, and defined benefit plans offer vesting benefits that may be better choices for companies with a high turnover or those that want to ensure long term loyalty from employees. Small businesses have many different
retirement savings options available today that were not available a few decades ago. Only a careful evaluation and comparison of the benefits and disadvantages with each type of plan will help determine which plan is right for your small business.