Submitted by: Frank Gutta, CPA
There are nearly 25 million small businesses in the US, according to the Small Business Administration, employing more than half of the private sector workforce.
As any small business owner will tell you, getting to be a small business owner has its risks and, of course, its rewards. The IRS code offers another opportunity for reward; helping self-employed individuals and their employees save for retirement.
Most known plans have been around for some time, and we all know them by their acronyms: IRA, 401k etc. which provide ongoing tax breaks and the benefits of tax deferred money compounding as we age and near retirement, but there are other plans available to small business owners with few or no employees:
Saving Incentive Match Plan for Employees (SIMPLE) is good if you have employees and you want them to be able to contribute by themselves to the plan. The employer is required to contribute 1%-3% of employee s compensation into the account. It is easy to set up and employees may contribute up to a limit of $11,500 (for 2010 and 2011.) Those over the age of 50 are able to contribute $2,500 more.
The plan has to be in existence by October 1 for you to be able to take advantage of that tax year.
Matching and non elective employer contributions must be made no later than the due date for filing the employer’s income tax return, including extensions.
SEP IRA, QRP (Keogh), DB Plan
In Simplified Employee Pension IRA (SEP) the employer makes all the contributions but the tax deductible limit is higher than in SIMPLE IRA and can be up to 25% of the yearly compensation, up to $49,000 (for 2010 and 2011.) The plan can be set up as you are about to file your taxes, including extensions.
QRP – Qualified Retirement Plan has the same benefits but has to be in place by December 31, even though the contribution can be added at a later time.
DB Plan Defined Benefit Pension Plan is best when your business generate high levels of income. It is a type of QRP that involves higher contributions. It also more appropriate for folks who are approaching middle-age or older and who expect to have plenty of cash during the next few years that they are prepared to divert to this plan.
Sometime called a Solo Plan, is close to the traditional 401(k) but has less administration. Allowable contribution is up to 25% (20% for self-employed owners) and salary deferral of $16,500 (for 2010 or 2011) is allowed. For people 50 and older there is an additional sum of $5,500 ( catch up contribution ) they can put aside in a year. The plan has to be set up before the end of the year but can be paid into by the tax filing date.
If you want your employees to shoulder most of the contribution, a SIMPLE IRA will do fine, but if you have very few or no employees and you want to increase your retirement savings, you might want to go with SEP or Individual 401(k) which allow greater contributions. As for yourself, your age and the income should play a role in that decision.
About the Author: Frank Gutta, CPA specializes in providing accounting and tax services to small business owners and professional practices in Fort Lauderdale, Florida. For more information, go here: