If I own my own small business should I open an IRA?
If you are self-employed or own a small business, other options you may have include contributing to a Simplified Employee Pension IRA (SEP-IRA) or SIMPLE plan.
A Simplified Employee Pension Plan, or SEP-IRA, is a tax advantaged retirement plan that allows employers to make pretax contributions to their own or their employees' accounts. Earnings in a SEP-IRA grow tax-deferred. Contributions to a SEP-IRA do not impact a participant's ability to contribute to a traditional or Roth IRA.
A SEP-IRA provides the benefits of a company-sponsored retirement program without the administrative expense, government reporting requirements, and complexity associated with many other types of retirement plans. These plans were specifically designed for:
Small corporations, including S corporations
The contribution rate must be greater than 0% and less than 25%.
A SIMPLE IRA Plan (Savings Incentive Match Plan for Employees) is a simplified retirement plan for small and growing businesses. A SIMPLE IRA Plan allows you to provide a retirement program for yourself and your employees without the administrative expense, government reporting requirements, and complexity associated with other types of retirement plans.
Who can establish a SIMPLE IRA Plan?
A SIMPLE IRA Plan is available to any business that:
is a sole proprietorship, partnership, corporation, or tax-exempt organization,
employs 100 or fewer employees who each received at least $5,000 in compensation from the company during the previous year, and
does not currently maintain another company-sponsored plan (e.g., SEP, SAR-SEP, Profit Sharing, 401(k), etc.)
Why provide a SIMPLE IRA Plan?
Easy to Establish, Simple to Maintain
We provide all the necessary documents and enrollment materials you need to make offering a retirement plan as streamlined and convenient as possible. Also, 5500 Series form reporting is not required. You simply take a deduction on your business tax return for the contributions to your employees’ SIMPLE IRA accounts.
Reduce Your Current Year Taxes
Contributions to a SIMPLE IRA Plan are considered a business expense and are tax-deductible for you, the employer.
Each employee’s taxable income is reduced by the amount of his or her salary deferral contributions. Your employees do not pay income taxes on contributions until they begin to withdraw money from the plan, usually at retirement. This means that their investment can accumulate more quickly than in a taxable investment vehicle.
Retirement Planning Control
The money contributed to a SIMPLE IRA Plan, as well as the investment earnings, are 100% vested. This means that you and your employees will always have complete control over your own retirement accounts. This provides additional retirement savings power.
What are the contribution limits?
A SIMPLE IRA Plan is funded through a combination of employee and employer contributions. Employees may contribute a percentage of their salary, up to $12,000 for 2014. Employers are required to make annual contributions and must notify all eligible employees by November 1 of which contribution method will be used the following year. These methods include:
3% Matching Contribution
Match each eligible employee's contribution, dollar for dollar, up to 3% of his or her annual compensation, or $12,000, whichever is less.
A lower match of between 1% and 3% of total compensation may be elected in no more than two years in any five-year period.
Also, if you will reach age 50 before the end of the plan year, you may make "catch-up" elective deferrals to SIMPLE IRAs.
2% Non-Elective Contribution
Contribute 2% of each eligible employee's compensation. If you choose this option you will need to make a contribution for all eligible employees, whether or not they contribute to the plan. The 2% Non-Elective Contribution is based on the first $260,000 of compensation in 2014. This dollar amount is adjusted for inflation.
What are "catch-up" contributions?
If you will reach age 50 before the end of the plan year, you may make a $2,500 "catch-up" elective deferrals to SIMPLE IRAs in 2014
Can employees take money out of the plan at any time?
Yes. Employees may take distributions from the plan; however, they will have to pay taxes on the money in the year they withdraw it. In addition, the IRS imposes a 25% penalty tax on individuals under age 59½ if a distribution is taken within the first two years of participating in the plan. After two years, the standard 10% penalty will be imposed on anyone under age 59½ who takes a distribution, except under certain circumstances..
Read Noel Swain's Sunday Business Column or listen on NPR.