BY CARRIE SCHWAB-POMERANTZ
FOR IMMEDIATE RELEASE
What's the Best Retirement Plan for Your Small Business?
(SET ITAL) Dear Carrie: My wife started a business 10 years ago and contributed to a regular IRA in the beginning. Three years ago, she incorporated the company, and it doesn't have a 401(k) yet. What's her best option for retirement savings right now? -- A Reader (END ITAL)
Dear Reader: This is an excellent question -- and one that every small business owner should ask, whether or not the business is incorporated. That's because, although contributing to an IRA is definitely a good idea, small business owners have several other options that can significantly increase the amount that can be saved for retirement in a tax-effective way.
Here are some small business retirement plans for your wife to explore. They offer a simple way for business owners -- either sole proprietors or employers with few employees -- to increase retirement savings opportunities and enjoy certain tax advantages without the paperwork, cost and administration required by a regular 401(k).
Incorporation isn't the key factor here, but specifics, such as whether your wife has employees and, if so, how many, can make one plan better suited to her situation than another.
SEP-IRA: THE EASIEST TO SET UP AND MAINTAIN, PARTICULARLY SUITED TO SOLE PROPRIETORS
A SEP-IRA (or a Simplified Employee Pension) can be a great choice for saving a lot and keeping paperwork to a minimum, whether or not you have employees. It's easy to open and lets you make fairly high annual contributions. It also gives you the flexibility to vary contributions -- or skip them entirely -- according to your yearly business needs.
A SEP-IRA can be ideal for a sole proprietor. Annual contributions can be as high as 20 percent of net self-employment income for an owner, up to $52,000 in 2014. However, there are a few caveats if you have employees.
First, all contributions are made by the employer, not the employee. And, as an employer, you're required to contribute the same percentage of an employee's compensation as you contribute for yourself. That could end up being a hefty sum if you have more than a few employees.
INDIVIDUAL 401(K): OFFERS HIGHER CONTRIBUTION LIMITS IF YOU HAVE NO EMPLOYEES EXCEPT YOUR SPOUSE
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