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Pros and Cons of Different Small Business Retirement Plans
As a small business owner, you may want a better retirement plan – one that will let you and your key employees save much more for retirement.
If the annual contribution limits on standard retirement plans disappoint you, you should know about these alternatives.
Simplified Employee Retirement Plans (SEPs). A SEP allows your business to simply set up and fund retirement accounts for your workers – and for yourself. Most SEPs don't even have to file annually with the federal government. Employer contributions are 100% vested from the start, and you can even supplement the SEP with another retirement plan. In 2013, these plans have a $51,000 maximum contribution limit.1,2
SIMPLE IRAs/SIMPLE 401(k)s. This is a small business retirement plan with mandatory employer and optional employee contributions. It appeals to small business owners who don't want to deal with plan administration or non-discrimination tests. In 2013, the maximum pretax employee contribution to a SIMPLE 401(k) or SIMPLE IRA is $12,000, $14,500 if you are 50 or older. All contributions are instantly 100% vested. The business owner must make fully vested contributions (of up to 3% of an employee's income). A SIMPLE IRA has age requirements and does not permit loans, while a SIMPLE 401(k) allows loans and has no age requirements.3,4
Safe Harbor plans. These plans combine the best features of a traditional 401(k) and a SIMPLE IRA. An owner-operator can avoid the big administrative expenses of a traditional 401(k) and enjoy higher contribution limits. The Safe Harbor plan allows for employers to make matching or non-elective contributions. Typically, employers match contributions dollar-for-dollar up to 3% of an employee's income. The 2013 limit on elective employee deferrals is $17,500, or up to $23,000 if you are age 50 or older.5
DB(k)s. These retirement savings vehicles marry aspects of a traditional pension plan to an auto-enroll 401(k). You and your employees can contribute to the 401(k) component through salary deferrals; plan participants also have the potential for a small income stream in the future. The pension-like income equals either a) 1% of final average pay times the number of years of service, or b) 20% of that worker's average salary during his/her five consecutive highest-earning years.6
And for the smallest businesses, there are...
Solo(k)s. Combine elements of a profit-sharing plan with a 401(k) and you have the Solo(k), a retirement savings vehicle designed for sole proprietors with no employees other than their spouses. In 2013, the maximum employee salary deferral contribution is $17,500, $22,500 for those 50 and older, as with a standard 401(k). The self-employed individual can also make a profit sharing contribution up to a combined maximum, including his/her employee deferral, of $51,000. So in 2013 the total contribution limit for a Solo(k) is $51,000 or $56,500 if age 50 or older.3,7
Keogh plans. Keoghs are designed for small unincorporated businesses. There are defined benefit, money purchase and profit-sharing Keoghs; the defined benefit variation is a qualified pension plan offering a fixed benefit amount. If you're self-employed and the Keogh is your only retirement plan, the 2013 contribution limit for a profit-sharing Keogh is $51,000 or 100% of eligible compensation, whichever is less; the maximum deductible contribution is 25% of eligible compensation. You can actually participate in other retirement plans in addition to your Keogh.8