Running a business involves plenty of daily fires to fight, and longer-term decisions like finding the right retirement plan may get pushed aside. But small business owners must find a savings solution that suits their needs.
Increased Employee Retention
To attract and retain top talent, you need a way to reward them for their efforts. Retirement plans for small business owners are essential to employees’ lives. Principal’s latest survey indicates that nearly half of small business owners say the top reason for offering employee benefits is to increase worker retention.
A strong employee retention strategy can also help your company’s bottom line. It’s well-documented that a high turnover rate can be costly for a business. According to the Principal study, turnover costs can include training time for new hires and lost productivity. In addition, retaining a long-term team of front-line employees can improve your client and customer experience by providing more knowledgeable and tailored service.
Small businesses can choose from many types of employee retirement plans to find the best fit for their needs and budget. If you are looking for a plan that can accommodate both employer and employee contributions, consider a traditional 401(k). For an easy-to-set-up plan that does not require nondiscrimination testing, check out a safe harbor 401(k). If you are a sole proprietor and prefer a hands-off solution, consider a SEP IRA. For a plan that defers taxes until withdrawal, look into a Roth IRA. You may even qualify for a tax credit to offset the cost of starting your business’s new retirement plan.
Tax-Advantaged Savings
If you’re a small business owner, you likely wear many hats and may have little time to manage the details of a retirement plan. That’s where a third-party administrator can come in handy. They can help you choose and manage your employees’ suitable retirement savings options. And they can offer services like payroll integration to make administering a plan as simple as possible.
Small-business owners who don’t have a retirement plan put themselves at a disadvantage compared to larger companies that do. But thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, it’s now easier than ever for small businesses to provide a workplace retirement plan. A federal tax credit of up to $16,500 over three years can help offset the administrative costs of setting up a plan.
Another way to save on taxes is through a Section 179 deduction or bonus depreciation, which allows small businesses to write off the cost of certain types of equipment in the year they buy them. This can be a big win for companies in the early stages of development when they’re most focused on getting their products to market.
Small business owners also have several tax-deferred savings vehicles, including SIMPLE IRA, SEP IRA, and 401(k) plans. These accounts allow you to reduce your hard-earned taxable income while offering other benefits such as investment flexibility and low account fees.
Tax-Free Distributions
Small business owners can take advantage of various retirement plans to help them save for the future. Generally, these plans provide a tax deduction for contributions, and distributions are typically tax-free. Depending on the plan type, it may also allow for higher contribution limits than an individual retirement account (IRA).
Most business owners are familiar with 401(k) plans, which offer a range of investment options and can be customized to fit the needs of different businesses. These plans are typically offered to companies with employees and may include an employer match, a vesting schedule, and a cap on how much an employee can contribute annually. However, these plans can have significant administrative costs, including a setup fee, monthly or annual administrative fees, and a per-participant fee for exchange-traded funds, mutual fund expense ratios, and brokerage commissions.
Alternatives to traditional 401(k)s for small businesses include Simplified Employee Pension Plans, or SEP IRAs, which are simple to set up and operate. They can also be more flexible, as business owners can decide how much to contribute yearly, and they don’t require yearly filings like 401(k)s do. They also have higher contribution limits than individual IRAs, and participants can’t take loans out of their accounts. In addition, many state-sponsored plans are in the works to allow small businesses to use bare-bones 401(k)s for themselves and their employees.
Flexibility
Retirement plans can help small business owners retain skilled workers and attract new ones, mainly if they offer attractive tax benefits. The specific plan type that will work best for your company depends on factors like the size of your staff and how much you wish to contribute. Other factors include the administrative burden you are willing to take on.
For example, Simplified Employee Pension Plans (SEP IRAs) are ideal for companies with only a few employees. They are easy to set up and have minimal administrative costs, including filing fees. In addition, SEP IRAs allow for more significant contribution limits than a traditional IRA or 401(k) plan and have flexible funding options.
A SEP IRA may also work well for self-employed individuals, especially those who operate as sole proprietors or are members of an S corporation, partnership, or limited liability company. These people can contribute to their SEP IRAs using earnings from their businesses and other sources of income.
The Simple IRA salvages some of the SEP-IRA’s simplicity for a similar plan while allowing employers and employees to contribute funds. Its low cost and ease of administration make it an excellent choice for many small businesses. Ultimately, it’s essential to talk with an expert about the types of retirement plans that suit your particular situation and goals.
