SEP, SIMPLE or 401(k): Which Retirement Plan Is Best for Your Small Business?

As the owner of a small business, you’re used to juggling a lot of responsibilities — everything from drafting business plans to creating budgets. So its no surprise that you’ll be the one to choose which retirement plan you provide for your employees.

There are many types of retirement plans to choose from, and regardless of whether you’re a sole proprietor or have 100 employees, there is a plan that will work for your small business. Many owners of small businesses choose a 401(k) plan because it’s the option most people are familiar with. However, this may not be the best option you.

Why Should Your Small Business Have a Retirement Plan?

The main reasons you should set up a retirement plan for your small business is because it will help you and your employees secure their future, it helps minimize employee turnover, and because it can be declared as a business expense when you’re filing your taxes.

There are three different types of retirement plans that will work for small businesses, including SEP-IRA, SIMPLE IRA, and 401(k) plan. There are two types of 401(k) — one for self-employed individuals, and one for companies that have 100 employees or more. Since we are discussing small businesses, we will not be discussing the second 401(k) because it’s not suitable for businesses that have about 10 employees or less.

Each one of these retirement plans is different, and what they cover varies. In order to choose the right plan for your small business, you’ll need to understand what each one offers and match them with the needs of your business and employees. If you’ve been using a retirement plan that doesn’t fulfill your business needs, you may be losing out on tax benefits or even offering sub-par employee contributions.

Take All of Your Options Into Consideration

First, let’s break down the major differences between the three most common retirement plans for small businesses:

  • SEP-IRA retirement funds require contributions by the employer only, but can be claimed as tax deductible because they’re considered a business expense.
  • A SIMPLE IRA uses employee contributions as well as employer contributions, which are also tax deductible.
  • A Self-Employed 401(k), or a Solo 401(k), is a retirement plan meant for self-employed individuals who work for your business, but do not have any ownership of the company.

Depending on which small business retirement plan you choose, you may be able to enjoy some tax benefits, such as:

  • Taxes may be deferred when your business is growing.
  • The ability to claim employer contributions as business expenses.
  • Your company may be eligible for a credit of up to $500 in the first three years that you offer a particular retirement plan.

Choosing the Right Retirement Plan for Your Small Business

As you take each plan into consideration, always keep your priorities in mind and look into what the trade-offs are. If the only people in your business are you and your business partner, you should consider a Self-Employed 401(k) in order to get the highest contribution limitations possible. If you have multiple employees, you will need to choose either the SEP-IRA retirement plan or SIMPLE IRA retirement plan, both of which cover your employees. The main difference between the two is that you would fund SEP retirement funds on your own, while SIMPLE would allow you and your employees to contribute.

Small business owners who know what they are looking for in a retirement plan may find it much easier to choose an appropriate plan for their company. If employee contribution or ease of administration is important, your choice should reflect that. Knowing what you need ahead of time is essential to choosing a plan because they all have their advantages and disadvantages.

The Good News

Fortunately, all three of these plans are affordable and easy to manage. Neither SEP nor SIMPLE requires employers to file with the IRS. The Self-employed 401(k), on the other hand, requires annual filing of form 5500 if plan assets rise above $250,000. Choosing the right retirement plan is important for both you and your employees, so you should do your research and only choose the small business retirement plan that works best for your business.

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