Retirement is often the last thing on entrepreneurs' minds.
Like life insurance, retirement planning is something that we tend to put off for the future, so focused are we on making sales, managing staff and putting out the daily fires. Often, it's only when our accountant taps us on the shoulder or our employees start complaining that we start hacking our way through the confusing thicket of SEPs, IRAs, Roths, Keoghs and 401(k)s. As a result, many small businesses end up with the wrong retirement plan or no plan at all.
The good news is that setting up a retirement plan for your business doesn't have to be complicated, and there are plenty of good resources available to guide you.
"Don't even try to become an expert in retirement plans," says Jean Sifleet, a Clinton, Mass., business attorney and the author of Beyond 401(k)s for Small Business Owners: A Practical Guide to Incentive, Deferred Compensation, and Retirement Plans. "It's much better to let the competitive marketplace work to your advantage and to find a financial advisor who can set up a plan that makes sense for you and your business."
Retirement plans let you sock away part of your current income tax-free. You only pay taxes on the money when you're older, presumably working fewer hours and being in a potentially lower tax bracket than you are today. It's also a forced savings plan that lets you deduct a small percentage of your paycheck without thinking about it. Finally, it's a way to reward loyal employees for helping you build your business.
Retirement plans for small businesses abound but choosing the right one can be tricky. Your current age, expected retirement age and number of employees are all factors. That's why it's important to consult your attorney, accountant or financial planner to help select a plan that's not only right for your company today but also makes sense for your company as it grows.
"A plan that sounds very affordable in the beginning can become very expensive as your company grows," Sifleet says. "By understanding your current situation and getting proposals from several different retirement planners, you'll gain a better understanding of what your options are."
Here are three of the most common retirement plans for self-employed individuals and small-business owners and the pros and cons of each:
SEP. A Simplified Employee Pension plan, also known as a SEP-IRA, works the way a regular IRA does, except that it has higher contribution limits. With a SEP, you can contribute and deduct as much as 20 percent of your net self-employment income or 25 percent of your salary if you're employed by your own corporation, subject to a cap of $49,000 per year. Because SEP contributions can vary, you can lower your contribution or eliminate it if you've had a bad year and don't have enough money to fund it.
SIMPLE IRA. A Savings Incentive Match Plan for Employees may be a better choice than a SEP-IRA as your company adds employees and grows. Under a SIMPLE IRA plan, your employees may choose to defer part of their salary while you as the employer make matching contributions of as much as 3 percent of their salary. For 2010, the salary deferral limits are $11,500 per employee, $14,000 if the employee is older than 50. SIMPLE plans typically involve more record-keeping than a SEP because you'll need to track not only your own contributions but those of your employees as well.
401(k). Originally designed for larger companies, the 401(k) is now available to self-employed business owners and small businesses. A 401(k) plan has a higher contribution limit than a SEP and is funded by both employer contributions and employee salary deferrals. For 2010, the salary deferral limits are $16,500 per employee, $22,000 if the employee is older than 50. The employer can match as much as 25 percent of the employee's compensation. Companies that have 401(k) plans are required to file Form 5500 with the IRS when the plan's assets reach $250,000.
Rosalind Resnick is founder and CEO of Axxess Business Consulting, a New York consulting firm that advises startups and small businesses, and author of Getting Rich Without Going Broke: How to Use Luck, Logic and Leverage to Build Your Own Successful Business. She can be reached at firstname.lastname@example.org or through her website, abcbizhelp.com.