Among the many things an entrepreneur has to take responsibility for when establishing a small business is establishing a retirement savings plan for himself and his employees. Typically, the plan to be selected will depend on the business size, the way it is structured, and how much the entrepreneur can afford to allocate money to it. Paul Haarman gives an overview of the various options of retirement savings plans that an entrepreneur has:
Paul Haarman says It is one of the simplest retirement savings plans where the minimum contribution by an employee is just $25, while the employer can contribute as little as $5 per pay interval. The employer does not have to incur any expenses for managing it because the government makes available all the materials required to explain the plan benefits to employees. The employer is also not force to match the contribution of the employee. The employees can save up to $5,000 per year though the limit is $6,500 for employees who are 50 years or older. The maximum accumulation permitted is $15,000 after which, the money has to be transferred to a Roth IRA privately held. Money in the account can be withdrawn at any time with any penalties or taxes.
Only the employer can make contributions to Simplified Employee Pension (SEP) plans. But the rider is that all employees have to be included in the plan without excluding anyone. Since there is no need to file any paperwork with the government. It works out fine for small businesses that can look after their employees without the usual hassles of documentation. Employer contributions cannot exceed 25% of the employee’s compensation or $57,000, whichever is less. According to https://money.cnn.com, the money is taxable only at the time of withdrawal. Employers are eligible for a tax deduction on their contribution and further enjoy the liberty to decide whether to make the contribution and how much they can contribute every year. Small businesses can also get a tax credit of $500 for three years to compensate for startup expenses.
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA)
The SIMPLE IRA is a great choice for businesses that have fewer than 100 employees. Under the terms of the plan, while the employees may choose to contribute, the employer must do so annually. Participation by employers is possible in two ways. They can match the contributions made by each of their employees, up to a maximum of 3% of their compensation. But can reduce to a minimum of 1% a maximum of two times in a block of five years, in case the company is not doing well enough. Alternatively, the employer can contribute 2% of the employee compensation without any need for employees to contribute; however, if they want to, their contribution is limiting to the amount contribute by the employer.
Small business owners have a difficult time establishing their businesses and making it grow quickly. While they will also need to take care of the retirement planning for their employees. It can be difficult for them to undertake complicated documentation, administration, and reporting formalities. The plans described above are all very simple to implement and execute by employers.