In the past two months, I have explained the advantages, disadvantages and features of five different types of retirement plans: traditional and Roth IRA, 401(k), SIMPLE IRA, and SEP IRA. These are probably the most popular retirement plans for business owners and their businesses. Today, I'll detail the benefits of a retirement plan and how to determine which is best for you.
Why should you have a retirement plan?
The first and most important reason to have a retirement plan, is to save for retirement. The days of pensions are quickly coming to an end, and you should not rely on Social Security for all of your retirement income.
If you are the sole employee at your business, there are certain plans that will allow you to contribute to your retirement plan and deduct it as a business expense. This is also the case if you have employees working for you. Offering a retirement plan is an excellent way to attract qualified employees.
How Do I Decide on a Plan?
So you've decided it is time to set up a retirement plan. How do you pick one? There are certain things you should keep in mind when making your choice. Are you a one man (woman) shop? Do you plan to keep it that way? If you have an employee, is he/she your spouse? How many employees do you have? Would you like them to be able to contribute? How much would you like to be able to contribute? Are you planning on expanding your business and the number of employees you have?
All these questions are essential to picking a plan. Certain plans are only for one person, like Traditional IRAs and Roth IRAs. Other plans allow for you to contribute if your spouse is your only employee, like a Solo 401(k). Once you have more than one employee, it becomes about containing costs and employee amount.
A SIMPLE IRA is for businesses with less than 100 employees. A SEP IRA is targeted towards individuals or businesses with a small number of employees because all contributions are made by the business owner. If you have a large number of employees or you plan on growing to a large number, then you should use a 401(k). This is the most popular retirement plan for corporations. Additionally, the SIMPLE IRA is much less expensive to set up and maintain than the 401(k).
Having a retirement plan should pay dividends. Not only do you save for your own retirement, you could contribute to the retirement of your employees, which helps retain and attract qualified, capable employees. Picking a retirement plan can be a difficult task. You should really work with an advisor to help you navigate all of your choices. Call us or view our articles on retirement plans for more information