When I started my small business, my initial focus was on growing revenue and building solid client relationships. As my business grew, I began to think about initiating a retirement plan. I started by doing some research on the plans available to a small business like mine and found that there were a number of options, each with different startup, management and funding characteristics. I also realized that there are four questions a small business owner needs to answer before choosing among the retirement plan options.
— Does your business have employees in addition to you and your spouse and is it likely to add employees in the future?
— What do you consider the most important characteristics of a small business retirement plan? For example, are you looking for a low cost, easy to administer plan; one that is funded mainly with employee contributions and with no or discretionary employer contributions; a plan with a broad array of investment options; or one that allows you and your employees to maximize annual tax-deductible contributions?
— Who will be responsible for overseeing and administering the plan?
— What is your primary reason for implementing a retirement plan? Is it to attract and keep employees, to maximize tax-deductible contributions or to build your personal retirement account?
The answers to these questions will help you decide which small business retirement plan is best for your company. Once you have the answers, use them to prioritize what you want to achieve with a retirement account. Then talk to a retirement specialist knowledgeable about retirement options for small businesses to help you choose the plan that will best meet your needs.
Among the most popular retirement plans to consider for your small business are SEP IRAs, SIMPLE IRAs or 401(k)s. Each has different cost, administration and funding characteristics. For example, if you are self employed or your small business has few employees and you want a low-cost, easy to manage retirement account, a SEP IRA or SIMPLE IRA might be the best choice. On the other hand, if you want to maximize tax-deductible contributions, a 401(k) plan may allow you and your employees to set aside more for retirement.
If none of these retirement plans satisfy your needs, there are others that you can consider, including profit-sharing plans and defined benefit plans (traditional pension plans). The latter usually offer the highest contribution limits available. At the same time, they have the highest administrative burden and may requirement professional help for setup and management. Also, all contributions to a defined benefit plan are made by the company for eligible employees. While a defined benefit plan is more costly to manage, it can be advantageous for an older small business owner who wants to accumulate the most retirement assets possible in the shortest period of time.
fc.standardandpoors.com, TD Ameritrade: Planning and Retirement