Business ownership entails many responsibilities, long hours, and exhausting work. After at least a 12 hour day, the last thing on your mind is retirement planning. The hope would be to sell your business and use that money as your retirement plan. Beyond the hope of selling your business at a substantial profit, you need a real retirement plan.
Unfortunately, many small business owners don’t have a retirement plan. Typically, they are incognizant of the “paying yourself first” mentality. This is troubling given the fact that small business owners can deduct their retirement contributions. You can save money tax-free this way but you can also try to various ways to save money on little things and then have money for holidays, having a vacation in some of the most beautiful islands in the world.
Aside from a Traditional IRA or Roth IRA, there are several business retirement plans available to you as a small business owner. However, let’s review the basics of 3 retirement plans:
Option 1: Simplified Employee Pension (SEP) IRA
This is a common retirement plan most small business owners have heard. This plan has the least amount of paperwork, low cost, low maintenance. If you are incorporated, you can contribute up to 25 percent of your income to a maximum of $49,000. If you are a sole proprietor, in a partnership, or a LLC taxed as a sole proprietor then you can contribute 20 percent of your self-employment income up to $49,000.
Option 2: SIMPLE IRA
This plan is designed for smaller companies; you and up to 100 employees. Each employee will have their own traditional IRA set up. It’s cheaper than to set up a 401(k) plan. You can contribute up to 100 percent of your annual income up to $11,400 and $14,000 over age 50. Employees can contribute a part of their salaries up to the same contribution limit. As an employer, you have three options to contributing to your employees IRA:
You can match your employees’ contributions up to 3 percentYou can contribute between 1 percent to 3 percent in compensation, but it can only be at 1 percent limit for a maximum of 2 years in a 5 year periodContribute a flat 2 percent of your employee in compensation; however, it has to be at least $5,000 regardless of what the employee contributes
Option 3: Solo 401(k)
This option is designed for small business owner who have no employees and have no intention of hiring any in the future. The contributions limits 2011 is $49,000 and $54,500 if you are age 50 or older. If your spouse (only your spouse) is on payroll, then you can double your contributions.