Key Takeaways:
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Small business owners have several tax-advantaged retirement plan options, including 401(k), Cash Balance, SIMPLE IRA, and SEP plans.
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Each plan offers different benefits for contributions, tax savings, and flexibility depending on business size and employee makeup.
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Working with a knowledgeable advisor can help select and manage the plan that maximizes retirement savings while minimizing administrative work.
At AP Wealth, we understand the challenges you face as a business owner. We recognize that your business and personal finances can be tightly meshed. Early on, small business owners often invest their profits back into the business to pay for capital expenditures and build working capital. In this building stage, there is often no money left over to put away for retirement. However, as the business matures and cash flow improves, business owners may wish to consider implementing a tax-advantaged retirement plan for themselves and their employees. These plans work for both single employee and multi-employee businesses. Below is a list of the most common retirement plans along with a brief description of each.
401(k) Plans
A 401(k) plan is a company-sponsored retirement account to which owners and employees can contribute. Employers may make matching contributions and/or profit-sharing contributions.
Cash Balance Plans
For business owners who are behind on saving for retirement, a Cash Balance plan is like a turbocharged 401(k) plan. It is similar to a pension plan and works well for single-employee businesses (doctors, lawyers, etc.) and multi-employee businesses where the employees are relatively young as they will have more years to retirement age so the required annual contributions are small. Business owners can put hundreds of thousands of dollars a year into these plans on a pre-tax basis.
SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
A SIMPLE IRA plan provides employers with smaller employee headcounts a simplified method to contribute toward their employees and their own retirement savings. Employees may choose to make salary reduction contributions and the employer is required to make either matching or non-elective contributions.
SEP Plans (Simplified Employee Pension)
A Simplified Employee Pension (SEP) is an individual retirement account (IRA) that an employer or a self-employed person can establish. The employer is allowed a tax deduction for contributions made to a SEP and makes contributions to each eligible employee’s plan.
Regardless of size, small businesses have options for employee retirement plans they can offer as part of their benefits package. The tax advantages for owners and employees vary for each of the plans above. Running your business is a full-time job. By hiring an advisory team with specialized knowledge in this area, you’ll be able to spend less time administering your plan, and more time doing what you do best – growing your business! We will guide you through the different options and help you select the plan which gives you the greatest tax advantage and ensures you will have adequate savings when you retire.
If you’d like to speak with us about creating a small business retirement plan, please call our office (706-364-4281) or email us at [email protected].
AP Wealth Management is a fee-only fiduciary firm in Augusta, GA, specializing in retirement and financial planning for local residents.
