Episode 101 - Saving for your retirement

There are a lot of retirement plan options for small business owners. How do you determine which one is right for you? In this episode, we discuss all the options to help you find the right plan for your biz. 

All the numbers in this post are valid for 2017. Each year, these numbers are updated by the IRS. 

Individual Retirement Plans (IRAs)

If you are just starting to save, an IRA might be an easy way to get started. An IRA will allow you to save up to $5,500 in 2017. If you are over the age of 50, you can make an additional catch-up contribution of $1,000. 

There are two types of IRAs: a traditional IRA and a Roth IRA. 

Traditional vs. Roth

It's important to understand the difference between these two plans to ensure you are achieving your goals. 

Traditional

With a traditional plan, you put the money in pre-tax, which means you get a tax deduction now. However, when you take the money out at retirement, you must pay taxes based on your normal tax rate. With a traditional IRA, you are also required to take "required minimum distributions"  starting at age 70 and a half even if you don't need the money. 

Roth

Roth IRA contributions are made with after-tax dollars. You won't save on taxes today but the money will be withdrawn tax-free at retirement. There are also no required minimum distributions required. 

SEP IRA

A SEP (Simplified Employee Pension) IRA allows you to put away a lot more money if you have a lot of profit. A SEP IRA allows you to put away $54,000 per year. However, in order to do that you must have a profit of $216,000. For a SEP IRA, you are limited to putting away 25% of your profit. Also, if you have qualifying employees, you must put the same percentage of their pay into their plan that you put into your plan. That can quickly add up. You can put in less than 25% but you are also limiting your own contributions to the plan. 

A SEP IRA allows you to put away $54,000 per year. However, in order to do that you must have a profit of $216,000. For a SEP IRA, you are limited to putting away 25% of your profit. Also, if you have qualifying employees, you must put the same percentage of their pay into their plan that you put into your plan. That can quickly add up. You can put in less than 25% but you are also limiting your own contributions to the plan. 

Solo 401(k)

A solo 401(k) is designed for single-owner or husband/wife owned businesses. This plan allows you to put away a lot of money but is more costly to set up and maintain. 

This plan is a hybrid between a contribution plan and a pension plan. The owners can put in up to $18,000 per year, plus another $6,000 if 50 or older. An additional contribution of up to 25% of profit can also be added to the plan for a maximum contribution of $54,000. It's nice because you can put up to $18,000 (or $24,000) away each year without having to worry about having a high profit. You can also elect to have a Roth option for the $18,000 (or $24,000). The pension portion would need to be traditional. 

However, if you hire employees that would qualify for your plan, you'll need to discontinue this plan and choose something else. You could pick a 401(k) without the profit sharing option or one of the other plans discussed. All 401(k)s have higher fees than the other options but it may be worth it for the amount of money you can put away. 

SIMPLE IRA

The SIMPLE IRA is a popular option for many small businesses because it is a plan that works whether or not you have employees and still allows for a nice annual contribution. 

A SIMPLE IRA allows you to put away $12,500 per year plus an additional $3,000 if 50 or older. Plus, you will also put an additional 3% of your profit. 

If you have qualifying employees, you will need to match their contributions but only up to 3% of their wages, which keeps the costs low. Also, the fees are typically paid by the employee (but are very low). 

Retirement Savings Contribution Credit

In addition to any tax deductions you might qualify for, you might also qualify for the Savers Credit. If you meet the income limits, you can even take this credit if you make a ROTH contribution.

This credit is designed to encourage low-income households to save for retirement. The maximum credit is $2,000 for a couple filing jointly, but your adjusted gross income cannot be more than $37,000 and the credit is only 50% of the contribution. As the credit phases out, the percentage and the maximum credit amount both decrease. If your income is $62,000, your maximum credit is $200 and 10% of your contribution. Luckily, if you put money into a tax-deductible plan, which lowers your AGI. 

That's why it's important to work with a CPA who can help you maximize your tax deductions. 

All figures are taken from Bankrate.com.

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