The Tax Implications Of Retirement Plans For Self-Employed And Small Business

Did you know that 34% of entrepreneurs do not have a retirement plan in place?

Are you ready to find out what the best small business retirement plans are for the new year? Keep reading to learn about our excellent tips.

Solo 401k

The first thing you should understand about a solo 401k is that you must set it up before the end of the year you plan on contributing money to it.

For example, if you wanted to put a certain amount of money onto your taxes as a retirement plan in 2017, you would be unable to do so if you set it up this year.

This is the stark contrast to the last minute SEP-IRA, which allows you to set up a retirement option passed the end of the calendar year.

There are two ways you can contribute money to a solo 401k. The first is making an employee contribution, which allows you to contribute up to $18,500 for 2018 if you are under 50, and $24,500 if you are 50 or older.

If you set up the 401k as an employee contributor anyone you hire over the age of 21 that works more than 1000 hours in a calendar year must be included in the plan.

However, if they do not contribute to the plan then you are not able to either, so be careful when looking at this as part of your small business retirement plans.

The second option is an employer contribution plan, which allows you contribute up to 20% of your yearly income.

There is a limit of $55,500 that can be contributed to both options.

Simple IRA

We briefly mentioned a last-minute SEP-IRA, but setting up a simple IRA could be your best option if you have a small number of employees (or zero besides yourself).

Contributions of up to $12,500 can be made by any employees under 50, and employees over 50 can contribute up to $15,500.

The simple IRA generally has a 3% employer matching contribution as well, so put that into consideration before going with this option.

One of the major drawbacks of a simple IRA is that loans cannot be taken out of the account.

Employees are able to withdraw money from the account with a significant penalty. The penalties are generally 25% if a withdrawal is made within the first 2 years of setting up the account.

Anyone under the age of 59 may also be subject to a percentage penalty that averages around 10%.

Choosing the Best Small Business Retirement Plans

As your business grows, you need to have a retirement plan set in place for yourself and future employees.

Going the 401k route can allow your employees flexibility in case of an emergency, while a simple IRA will give them the opportunity to grow their own retirement and not be tempted to take money out of it without suffering a significant penalty.

If you have any questions or would like to discuss your financial options, please contact us and we will work to help you!



About the Author:

Chris Duncan, CPA

As a South Carolina native, Chris has spent the better part of his life in the Charleston area. Chris graduated from The Citadel with a degree in Business Administration (Accounting Concentration) in 1999. Chris has spent his career working with large manufacturing and distribution companies, real estate developers, as well as many high net worth individuals. In 2006, Chris launched his own CPA firm. For the past twelve years, Chris has worked as a local CPA and provided services to both individuals and commercial clients in a variety of industries to include accounting, bookkeeping, tax, and payroll services.

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