Self Employed? Entrepreneur? Have You Considered a Small Business IRA?

By Elsie Dudukovich0 Comments

Creating, launching, and sustaining your own business is a major endeavor.  When the majority of your time and energy is focused on your business, it’s possible to lose track of retirement planning. 

Fortunately, the IRS has a variety of Small Business IRAs to help you save and invest for your future retirement.  IRS Publication 560 provides details on retirement plans for small businesses. 

Simplified Employee Pension (SEP)
If you’re self-employed, a SEP can be a way of contributing more towards your retirement (and the retirement of your employees) than the contribution limits allow for traditional and Roth IRAs.

Here are some highlights of the SEP
  • An employer may contribute up to 25 percent of each employee’s annual compensation.
  • Contributions to a SEP are tax deductible, and earnings within the account are tax-free until withdrawn.
  • Any employer—whether a corporation, partnership, or self-employed individual—may establish the plan, even if there is only one employee.
  • To participant in the plan employees must meet ALL of the following requirements:
    • Be at least 21 years of age
    • Have worked for the business during any three of the past five years
    • Have earned a minimum of $600 in compensation
  • Spouses and children may also participate in the plan and open their own SEP IRAs—as long as they are employees of the company and meet the income requirements.
For more information, visit IRS Publication 4333 in addition to Publication 560.  These publications discuss the various attributes of the plans, eligibility guidelines, and other IRS requirements.
 
Savings Incentive Match Plan for Employees (SIMPLE)
The SIMPLE IRA was designed to provide a retirement plan for small businesses with 100 or fewer employees who have no other qualified plans.  Similar to a Traditional IRA, contributions in a SIMPLE are tax deductible within the year they were made and earnings within the account are tax free until withdrawn.

Here are some highlights of the SIMPLE:
  • Employers are generally required to match each employee's salary reduction contribution, on a dollar-for-dollar basis, up to 3 percent of the employee's compensation.
  • You can establish a SIMPLE IRA plan if you meet the following requirements:
    • You meet the employee limit
    • You do not maintain another qualified plan, unless the other plan is for collective bargaining employees
    • You have 100 or fewer employees who received $5,000 or more in compensation from you for the preceding two year period. Under this rule, you must take into account all employees who were employed at any time during the calendar year, regardless of whether they're eligible to participate.
The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year in which the SIMPLE IRA plan becomes effective.

For more information, visit IRS Publication 4334 in addition to Publication 560.  These publications discuss the various attributes of the plans, eligibility guidelines, and other IRS requirements.