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Plan, Invest, Retire—Small Business Edition

Why should you, as a small business owner, invest in a retirement plan? Having a retirement plan could help you and your employees save for the future. Additionally, there are significant tax advantages** for having a retirement plan, including:

  • Your contributions are deductible when made.
  • Your contributions aren’t taxed to an employee until distributed from the plan.
  • Money in the retirement program grows tax-deferred (or potentially tax-free as with Roth accounts).

There are many different retirement plans for small businesses. So, how do you know which one is best for you and your small business? First, you’ll want to clearly define your goals. For example, do you want:

  • To maximize the amount you can save for your own retirement?
  • A plan funded by employer contributions? By employee contributions? Both?
  • A plan that allows you and your employees to make pre-tax and/or Roth contributions?
  • The flexibility to skip employer contributions in some years?
  • A plan with the lowest costs? Easiest administration?

Your answers to these questions and understanding what options are available and how they work can help guide you and your retirement professional to the plan (or combination of plans) that work best for you. We’ve outlined some different retirement plans below.

SEPs

A SEP allows you to set up an IRA for yourself and each of your eligible employees. You contribute a uniform percentage of pay for each employee, although you don’t have to make contributions every year. SEPs have low start-up and operating costs and are easily established.

SIMPLE IRA Plan

A SIMPLE IRA plan is available if you have 100 or fewer employees. Employees can elect to make pre-tax contributions. You are required to either match your employees’ contributions dollar for dollar—up to 3% of each employee’s compensation—or make a fixed contribution of 2% of compensation for each eligible employee.

Profit-Sharing Plan

Typically, only you, not your employees, contribute to a qualified profit-sharing plan. Your contributions are discretionary—there’s usually no set amount you need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose (as long as your contributions are non-discriminatory and “substantial and reoccurring”). The plan must contain a formula for determining how your contributions are allocated among plan participants.

401(k) Plan

The 401(k) plan (technically a profit-sharing plan with a cash or deferred feature) is a popular retirement savings plan for small businesses. Employees can make pre-tax and/or Roth contributions. These deferrals go into a separate account for each employee and aren’t taxed until distributed. You can also make employer contributions to your 401(k) plan—either matching contributions or discretionary profit-sharing contributions.

Defined Benefit Plan

A defined benefit plan is a qualified retirement plan that guarantees your employees a specified level of benefits at retirement. As the name suggests, it’s the retirement benefit that’s defined, not the level of contributions to the plan. The services of an actuary are generally needed to determine the annual contributions that you must make to the plan to fund the promised benefit. Contributions may vary from year to year, depending on the performance of plan investments and other factors. These plans are costly and complex; however, because they can provide the largest benefit of any retirement plan and therefore allow the largest deductible employer contribution, defined benefit plans can be attractive to businesses that have a small group of highly compensated owners who are seeking to contribute as much money as possible on a tax-deferred basis.

Choosing a retirement plan for your small business is no easy decision, and you’re going to want an experienced professional to help you analyze all your options so that you can make the best decision for your business. Our CFS* Financial Advisor, Monaye Nelson-Morgan, can help guide you through your decision process to find the plan that best suits your business needs. To get started, contact Monaye at (858) 530-4495 or mmorgan@cusonet.com.

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor.  Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

**CUSO Financial Services, L.P. (CFS) does not provide tax or legal advice. For such guidance, please consult your tax and/or legal advisor.

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