April 15th the Federal Tax deadline, but it is also the deadline for potential tax savings. Making contributions to Individual Retirement Account, or IRA, can directly reduce your tax liability for the previous year.
As you know, many companies today offer their employees a 401(k) retirement plan, making it simple for employees to enroll, contribute money directly from their paycheck, and start to build an independent financial future. But what about small businesses or those who are self-employed? Here are three different retirement plans that small business owners or those who are self-employed can set up to save money on tax day.
Option #1: A SIMPLE IRA.
Yes, they’re simple—they’re also SIMPLE (Savings Incentive Match Plan for Employees). These IRA plans are popular with small businesses that have 100 or fewer employees. They’re easy to set up and cost small business owners virtually nothing because there’s very little administrative paperwork.
There are two ways to establish SIMPLE IRA plans. The difference is the form that’s used to set up the plan. The 5304-SIMPLE form is used if you want your employees to be able to choose the financial institution where their contributions will be deposited. The 5305-SIMPLE form enables you, as the employer, to designate the financial institution where all of the contributions will be deposited. In either case, your employees choose their own investment allocations within their account.
One benefit your employees will have with a SIMPLE IRA is they can contribute more to the plan than if they had a traditional or Roth IRA. With a SIMPLE IRA, the contribution limits for 2015 are $12,500, with a catch-up contribution of $3,000 for employees 50 years of age or older.
Keep in mind that SIMPLE IRA plans must be opened by October 1 and that your contribution is mandatory, regardless of whether you’re having a good or bad year with your business.
Option #2: A SEP IRA
A SEP (Simplified Employee Pension) IRA is much like a traditional IRA in that both contributions and any investment growth of the fund are tax-deferred. Like a SIMPLE IRA, the setup and maintenance of a SEP IRA is easy. And while there may be some administrative costs involved with setting up a SEP IRA, usually they are low.
A big incentive for your employees is that they don’t make contributions to a SEP IRA. SEP IRAs only allow for employers to make contributions. Of course, those contributions are tax deductible. An especially nice option with a SEP IRA is that, subject to limits, you can contribute more if your business has a good year, or less if it has a bad year. This can be a strong incentive for your employees to stay on the job and find ways to contribute to the overall profitability of the business.
As you consider a SEP IRA, remember that you do not have to contribute every year. In years when you do make a contribution, you must contribute to the SEP IRAs of all employees, including those who have quit or have been terminated or those who died before the contributions were made. Also keep in mind that contributions must be uniform, meaning all employees receive the same percentage of their compensation.
Option #3: A Solo 401(k)
What if you have a very small business…as in you’re self-employed and have no employees? In that case, you might want to look into a Solo or individual 401(k). A Solo 401(k) works much like a traditional 401(k) plan offered by larger companies.
The benefit of a Solo 401(k) is that you can contribute to your account in your capacity as both employee and employer. As an employee, you can save as much as $18,000, with an additional $6,000 in catch-up contributions if you’re 50 or older. As the boss, you can contribute an additional 25% of compensation, up to a maximum of $53,000, including your employee contribution.
Also, contributions to a Solo 401(k) are discretionary, which means you can contribute during good business years, and opt to not contribute when your business is not doing as well.
Owning a small business can be very gratifying. After all, you and your employees are dedicated to seeing your business succeed. Show your appreciation with more than a paycheck and help your employees get on the path to a secure retirement by establishing either a SIMPLE IRA or SEP IRA. If you’re the sole proprietor of your small business, consider a Solo 401(k) to get your own retirement plan off to a good start.
Information regarding retirement plans is general and is not intended as legal or tax advice. This information is general in nature and should not be construed as tax or legal advice. Neither Signator Investors nor its Representatives may offer tax and/or legal advice. Retirement plans are complex, and the federal and state laws or regulations on which they are based vary for each type of plan and are subject to change. In addition, some products, investment vehicles, and services may not be available or appropriate in all workplace savings plans. You may wish to seek the advice of legal counsel or a tax professional to address your specific situations.