Starting your own business comes with certain risks, both personal and financial. However, your retirement plan should not be one of them. No matter your age or how stable your finances are right now, you never what the future will bring, so saving for retirement should be one of your top priorities in life. You may have contributed to an employer-sponsored 401k at a previous job, but what are your options when starting your own business?
Even if you’re a sole proprietor, you can still have a 401k plan. You can set up and contribute to a Solo 401k plan (also known as an Individual 401k or a One Participant 401k). This is true even if your spouse works for the business. You cannot have any other employees to utilize this type of plan. You can setup the plan at a bank or other financial institution. You can then contribute pre-tax funds into a savings, mutual fund, or money market account.
Since you are both the employer and employee, you can contribute to your retirement plan as both. As the employee, you can contribute up to 100% of your earned income up to $17,500 per year. If you are at least age 50, you can contribute another $5,500. Further, as the employer, you can contribute another 25% of your earned income. The total contributed amount cannot exceed $51,000 per year. These limits are for 2013 and will increase by $500 per year to counteract inflation.
So, what if your business is growing and you need to hire some help? Offering a retirement plan can help attract better employees and doing so will allow you to offer less in salary. Moreover, you can deduct the cost of the plan from your business’s taxes every year. However, since it’s not a solo proprietorship now, you cannot use a Solo 401k plan, but there are alternatives.
A traditional 401k plan will allow you to make contributions on behalf of your employees, match employee contributions or both. Employees can contribute through pre-tax payroll contributions. Benefits must be proportional to all employees and employer contributions are subject to a vesting schedule.
A safe harbor 401k is very similar to a traditional plan. The differences include: employer contributions are fully vested when made, there are fewer complex tax rules which make it easier to run and the plan is exempt from nondiscrimination testing.
The automatic enrollment plan allows employers to deduct a certain amount from each employee’s wages and contribute it to a retirement plan on the employee’s behalf. The employee must choose to either opt out or elect to contribute a different amount.
Finally, there’s the SIMPLE 401k plan. This is a simple plan specifically for small businesses (those with less than 100 employees). It’s easy to set-up and maintain and is very cost efficient.
Whether you’re just starting your own business or already have one, a retirement plan option is very important. You can set up a plan on your own, but it’s not recommended unless you’re very familiar with tax laws. The experts at the IRA Financial Group are the nation’s leading facilitator of Solo 401k plans.