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Retirement Planning for Small Businesses

If you’re a small business owner, chances are you dreamed for a long time about running your own company – but chances are, you don’t want to do it forever. And yet, many entrepreneurs neglect retirement planning, which is the very thing that will allow them to get out comfortably.

Big mistake.

According to a 2016 GoBankingRates survey, just more than a third of adult Americans have absolutely nothing saved for retirement – and another third or so have less than $1,000 pegged for their post-career lives. Compare that with the conventional thought that you need to have somewhere between $1 million and $1.5 million saved up by retirement to get along comfortably, and it’s clear that retirement planning is broadly a wide problem.

Small businesses and their employees are exceptionally problematic, as many owners believe operating a plan is simply too expensive. The Pew Charitable Trusts found in a survey that just more than half of small- to midsize businesses (five to 250 employees) even offered some kind of plan, and nearly 60% of those that didn’t pointed to either financial cost or organizational resources as the reason why.

Retirement plans are a pivotal aspect of succession planning, not to mention an appealing benefit that can help bring in higher-quality employees. And they’re not out of reach, even for the smallest of businesses. The following are four common types of retirement plans for small businesses to help you better understand your options.

What Retirement Plans Are Available for Small Business Owners?

1. 401(k): A 401(k) – the most common type of retirement plan – is an employer-sponsored plan that allows employees to put pre-tax earnings into a savings account. They then can invest this money, typically in one of several mutual funds offering exposure to things such as stocks and bonds. The fees for these vary widely, but include things such as plan management, record-keeping and investment management/consulting fees – and smaller businesses typically shoulder higher fees than larger companies. That’s why many small companies tend to gravitate more toward the next three plans.

2. Savings Incentive Match Plan for Employees (SIMPLE IRA): This is fairly close to a 401(k) plan in that contributions can come both from an employee’s pretax earnings, as well as from the employer (which can then deduct these contributions). These are available only to companies with 100 or fewer employees – usually with either a low bundled fee, or a small cost per participant – and lets employees contribute via salary deferral up to 100% of compensation, capped at $12,500 in 2017. Businesses must make one of two types of mandatory contribution.

3. Simplified Employee Pension Plan (SEP IRA): The SEP IRA applies to businesses with any number of employees, but is wholly employer-funded with tax-deductible contributions of up to 25% of an employee’s compensation, capped at $54,000. Setup and annual fees are typically low, and some providers even feature no-cost setup and fees, instead making their money on trading and other charges.

4. Self-Employed 401(k): The self-employed 401(k) is, as the name implies, really only useful to self-employed people, including business owners with no employees other than a spouse. Like the SEP IRA, self-employed 401(k) contributions are capped at 25% of compensation up to $54,000 – including an $18,000 cap on deferred salary contributions. Several providers offer solo 401(k) plans with no setup or annual maintenance fees.

Which Plan Is Best for You?

Not sure what retirement plan fits best with your small business? That’s OK. It’s a complicated subject – but one that the business consultants at McManamon & Co. are ready to help you with. Lean on our expertise with small and midsize businesses, and we can help guide you through the plans, including how to implement them.

Don’t let retirement sneak up on you or your employees. Call us at 440.892.9088 or contact us online to find out what retirement planning options are available for you and your small business.

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