Three Reasons To Start A Retirement Plan For Your Business
Retirement Plans for Small Businesses and Self-Employed Individuals:
- A good choice for businesses with fewer than 100 employees that want an easy-to-operate plan that their employees can contribute to, as well as their business.
- Funded soley by employer contributions. This plan's high contribution limits help make it a good fit for owner-only businesses that want to make substantial contributions to their own retirement accounts.
- A good choice for businesses that want to allow their employees to contribute, as well as their business to make matching or profit-sharing contributions. High contribution limits, vesting schedules, and a Roth option make 401(k) plans attractive.
- A "starter" retirement plan for businesses that want to make it easy for their low- and middle- income employees to begin to save for retirement. Without any cost to the business.
1) Higher Contribution Limits Than Regular IRAs
- Most Business retirement plans will permit you to contribute more money per year to your account than a regular IRA will allow. How much more? To give you an example, the SEP-IRA retirement plan permits a business to contribute up to 25% of an employee’s compensation, up to a maximum contribution of $53,000, in 2016. A regular IRA limits contributions in 2016 to $5,500 ($6,500 if you are age 50 or older). If you are self- employed or own a small business and want to save large amounts each year on a tax-favored basis, you owe it to yourself to explore your business retirement plan options.
2) Tax Breaks for you and Your Business
- A tax deduction for your business
- Contributions that your business makes to your account and your employees’ accounts are generally deductible as a business expense.
- A reduction in your personal income taxes.
- If you choose a plan that allows employees to contribute, you can contribute part of your pay before income taxes are withheld from it, which reduces your taxes for the current year. For example, if you contribute $10,000 of your compensation to a SIMPLE IRA account or a tax-deferred 401(k) account, you will not have to pay income tax on that $10,000 this year. Income taxes are postponed until the money is withdrawn from your account. If you choose a 401(k) plan that offers Roth accounts, you can make after-tax contributions instead of pre-tax contributions to your own account. Although after-tax contributions will not reduce you current income taxes, withdrawals from your Roth account in retirement are tax-free, as long as you follow the rules.
- Tax-deferred or tax-free growth potential
- Your investment earnings are not taxed while they are in the retirement plan. Because they are not subject to tax each year, as they generally would be in a taxable account, your earnings have the potential to grow faster, resulting in a larger nest egg at retirement. Your investment earning may eventually be taxed, depending on your type of retirement account. Earnings in a tax-deferred account are subject to income tax when withdrawn from the account. Earnings in a Roth account can be withdrawn tax-free in retirement, provided the rules for Roth accounts are followed.
3) Attract and Retain Better Employees
- Because many job applicants and employees place a high value on access to an employer-sponsored retirement plan when considering whether to join or stay with a company, adding a retirement plan to the perks that your business offers can help attract qualified job applicants and minimize employee turnover. There is still time to set up a retirement plan for 2016, although you will need to act soon (generally by October 1, 2016) if you want to set up a SIMPLE IRA.
For more information on choosing the right retirement plan for your business, contact a Copper Leaf Financial advisor at one of our Vermont locations:
33 Blair Road, Williston, VT 05495 | 802.878.2731