As we discussed in part one of this blog, retirement plans offer significant tax advantages to small business owners and give both you and your employees a significant incentive to save for the future.
With the first part, we identified the factors—depending on your company’s size and retirement objectives—to consider when choosing a plan. We also gave you an overview of SEP (Simplified Employee Pension) and SIMPLE IRA plans.
As we explained in the first part, this blog isn’t an attempt to give you enough information to make a final decision. It should help you become familiar with the various plans so you are better prepared to discuss them further with you CPA or other financial advisor.
Here’s a look at 401(k) and Solo 401(k) plans:
401(k) Plans
Per the IRS: “A traditional 401(k) plan allows employees eligible to participate in the plan to make pre-tax elective deferrals through payroll deductions. In addition, in a traditional 401(k) plan, employers have the option of making contributions on behalf of all participants, making matching contributions based on employees’ elective deferrals, or both”.
Pros
- Available to any employer regardless of staff size
- Employees can make elective deferrals up to $18,500 in 2018
- Employees 50 or over can make elective deferrals up to $24,500 in 2018
- Total of employer and employee contributions limited to $55,000 (in 2018) or 100% of the employee’s compensation—whichever is lower
- May vest over time according to plan terms
Cons:
- Plan adoption and setup costs
- Annual third-party administrator fees
- Annual filing with IRS
Solo 401(k) plans
Per IRS: “A one-participant 401(k) plan—also called a Solo 401(k), Solo-k, Uni-k, or One-participant k—is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.”
Pros:
- Allows self-employed individuals to obtain significant tax and retirement benefits through income deferral
- Company can match 25% of the employee’s compensation
- Owner/Employee or Employed Spouse can make elective deferrals up to $18,500 in 2018
- Owner/Employee or Employed Spouse 50 or over can make elective deferrals up to $24,500 in 2018
- Total contributions limited to $55,000 (in 2018) or 100% of the owner/employee’s compensation—whichever is lower
Cons:
- Plan adoption and setup costs
- Annual third-party administrator fees
- Any subsequent employees added to staff must be included
- Annual IRS filing
In Part Three of this series, we’ll look at Qualified Plans—both defined benefit and defined contribution—Cash Balance Plans, and Voluntary After-Tax Employee Contributions.
