#WealthforLife Wednesdays: Retirement Plan Options for Small Businesses

I’ve spoken with enough small business owners to know that saving for retirement isn’t the first thing on their mind. In fact, many of them delay saving for their golden years believing that their business will generate large profits overnight or that they will be able to fund their retirement by selling their enterprise for millions one day. This is great if it works out for you, but sadly most of the time it does not.

“Small business owners need to think about the what if,” says McKenzie Slaughter. Reinvesting all your funds back into your business is “an all or nothing game. You’re putting everything on the line and not having any diversification is very risky.”

Slaughter is the Founder & CEO of Prohaus Group, a private company that invest in financial startups and bridges the innovation gap among retail and institutional investors. Founded in 2010, her company currently owns and operates four financial startups: Beyond Capital Markets, Brandups, Beauty 
& The Bull Magazine and The Young Crowd.

“Experienced or not, you don’t know if your business will be successful, make you rich or be acquired. If the business is a success, it doesn’t happen overnight and even if you’ve been in business for 10-20 years, one mistake could still ruin the business forever. You must understand these risks from a financial perspective and be financially prepared for these risks to happen (worst case).”

When starting out, Slaughter says she made small contributions of $20 to $50 per month in a Roth IRA. The plan allows her to invest up to $5,500 per year and contributions are made with after tax dollars.

If you’re looking for a retirement plan option for your small business, here are some of the most common options available to you:

SEP IRA: The Simplified Employee Pension is a top choice if you are the sole owner or have a partner who is an owner. The plan is funded solely by employer contributions and you can contribute up to $51,000 annually. However, there is no option for catch-up contributions after the age of 50. Employers can contribute up to 25% of the employee’s compensation or a maximum of $51,000. Loans are not permitted and assets may not be used as collateral.  You can withdraw at any time, but a 10% penalty may apply if you are under age 59½.

SIMPLE IRA: The Savings Incentive Match Plan for Employees is another option for small businesses with 100 or fewer employees. It’s similar to a 401(k) plan in which retirement benefits are offered through employee salary deductions and employer non-elective or matching contributions. Employees can contribute up to $12,000 in salary deferrals; $14,500 if age 50 or older. The plan offers catch up contributions of $2,500 and employers may choose to match employee contributions less than 3% but must be at least 1% in any two out of five years or employers can choose to contribute 2% of each employee’s compensation, up to $5,000. Funds can be withdrawn at any time, but a 10% penalty may apply if you are under age 59½. If the withdrawal is taken within first two years of participation in the plan, that 10% tax is increased to 25%.

Solo 401(k): This is the ideal plan for owners over the age 50 with no employees. The business owner wears both hats, acting as employer and employee. This plan is funded by employee deferrals and employer contributions. Employees can contribute up to $17,500 in salary deferrals; $23,000 if age 50 or older and allows catch-up contributions of $5,500. Employers may contribute up to 25% of compensation up to a maximum of $51,000. Total contributions to the participants account, not including catch-up contributions, cannot exceed $51,000. You cannot take withdrawals from the plan until a “trigger” event occurs, such as turning age 59½, disability, and/or plan termination.

401(k): This is the most popular for owners who have employees. This plan has high contribution limits; 17,500 in salary deferral or $23,000 if age 50 or older (limits may vary by plan) and you can choose whether to match your employees’ contributions or not. This plan is generally best for companies with 20 or more employees. Employers may make a matching contribution or profit sharing contribution up to 25% of compensation up to a maximum of $51,000; total employer/employee contributions cannot exceed $51,000. Loans are permitted and hardship withdrawals may be available but a 10% penalty may apply if you are under age 59½.

For more information on each of these plans visit irs.gov

SPECIAL OFFER: This month Slaughters financial startup, BrandUp , will offer nine on-line small business classes to help entrepreneurs grow their enterprise. Want to attend? Tweet me @LaToyaReports. Tell me about your business and which class will help take your firm to the next level and you’ll be entered for a chance to win a free registration to the course of your choice.