Small Company Retirement Plan Options
For small business owners, choosing the right type of retirement plan can play a vital role in attracting and retaining the best talent. There are several different types of retirement plan options that a small business owner may consider, including a 401(k), IRAs or profit-sharing plans.
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Function
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Offering a retirement plan for a small business can provide employees and business owners with a way to save for retirement. Depending on the individual plan, employees may be allowed to set aside a designated portion of their paycheck and the employer may also contribute to employee accounts. Contributing to retirement accounts also gives the business a tax deduction.
401(k)
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Even though 401(k)s tend to be viewed as a retirement option for big companies, smaller companies may still take advantage of them. There are plans for companies of 25 employees or less. Employees can make contributions generally larger than those available with other plans. The employer can make contributions but a match is not required and they will provide a tax benefit. One drawback is that the administration of the 401(k) may be more expensive than with other plans.
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IRAs
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There are two different types of IRAs available for small businesses. The Simplified Employee Pension Plan (SEP IRA) and the SIMPLE IRA are both similar options that provide flexibility for business owners. With the SEP IRA, the owner can contribute up to 25 percent of his own or his employees' income. Employees cannot contribute. The owner must contribute the same percentage of salary to the employee accounts as he does to his own. With the SIMPLE IRA, employees can contribute money to their own accounts, which must be matched by the employer. The employer can choose between a mandatory two-percent contribution regardless of the employee's contribution or an elective match up to three percent of the employee's salary.
Profit Sharing
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Another type of small business retirement plan is a profit-sharing plan. With this type of plan, the profits from a year are divided up among the employees. Employers can put in up to 25 percent of their employees' annual salaries. With this type of plan, the employees do not make contributions and the profit-sharing amount will likely fluctuate from one year to the next.
Considerations
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To help select the right small business retirement plan, its administration and investment options need to be considered. Besides having a plan that is relatively inexpensive and easy to administer, the business owner should ensure that the plan offers a mix of investments. The owner will most likely be making contributions for himself as well and having a variety of investment options can aid his own retirement account.
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