Small Business Retirement Plan Comparison
If you own or operate a small business and want to add a retirement program to your employee benefits package, choosing the best one for your situation can be difficult. Several different types of retirement plans are available, each with its own pros and cons. Understanding the differences between the most common types of small business retirement plans will help you to make an educated and informed decision that benefits you and your workers.
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Qualified Plan Basics
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Money deposited into an employer-sponsored retirement plan results in an income tax deduction for the aggregate contribution. Additionally, any growth within that account remains untaxed until you actually withdraw the funds. The amount withdrawn is added to your taxable income for that year at ordinary tax rates. IRS regulations state that any withdrawals from qualified plans made prior to age 59 1/2 result in an additional 10-percent penalty on top of the ordinary income taxes due. If money remains within a qualified plan by age 70 1/2, mandatory withdrawals, called Required Minimum Distributions, are arranged based on average life expectancy.
SEP
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A Simplified Employee Pension, or SEP, permits contributions up to the lesser of 25 percent of compensation or $49,000. Employees are unable to make contributions to a SEP, and the employer must contribute the same percentage for all participating employees. Only those employees who are over 21 years old, who earn more than $550 in that year and have worked for the employer at least three of the past five years may participate in a SEP plan.
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SIMPLE IRA
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The SIMPLE IRA permits employee contributions up to the lesser of 100 percent of compensation or $11,500. Employers choose whether to match employee contributions between 1 and 3 percent, or contribute a fixed 2-percent for everyone. Only those employees expected to earn at least $5,000 this year, and who also earned at least that much during any two previous years, may participate in the plan.
401(k)
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The 401k permits employee contributions up to the lesser of $16,500 or 100 percent of compensation. Employers may choose to match contributions but are not obligated. The combined total of employee and employer contributions into a 401k cannot exceed $49,000 for the year. Employees must be over 21 years old and must have been working for the same company for at least one year.
Profit Sharing
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Profit sharing plans permit employer-only contributions up to the lesser of 25 percent of each worker's annual earnings or $49,000. Contribution amounts are established annually, and the employer retains the ability to increase or decrease them each year, which includes making no contribution at all. The plan must be offered to all employees over 21 years old who worked at least 1,000 hours the preceding year.
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