One oft overlooked retirement plan for the small business owner is the SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees. This allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.
As opposed to a traditional or Roth IRA where you can only contribute up to $5,500 for the year ($1,000 more if you’re at least age 50), with a SIMPLE IRA, you can contribute up to $12,000 ($2,500 more if you are 50+) as an employee. Further, as the business owner, you can contribute up to 3% of your net self-employment income.
You must offer a match to every employee who signs up for the plan who makes at least $5,000 per year. You do not have to put money aside for those who do not sign up. This is a much cheaper choice than a SEP IRA, where you must make the same percentage contribution to all employees. Also, there is no percent of income restriction with a SIMPLE. Another great advantage is that the owner gets a tax deduction for all matches made to his/her employees. Note that if you have a regular job and contribute to a 401k plan there, any employee contributions you make to a SIMPLE will count against your contribution limit to your 401k.
This type of plan works for a married couple who works together as well. If your spouse is on the payroll of your business, he/she may also contribute up to the annual limit in addition to 3% of pay matched by the employ spouse. Furthermore, if one spouse is the big money earner and the other makes a small profit, you can use the SIMPLE to shelter most, if not all, of the secondary income.
One last thing to note is that a SIMPLE IRA must be set up by October 1st to make contributions for the year.
If you have a small business and are looking to set up a retirement plan for you and your employees, contact the tax experts at the IRA Financial Group who specialize in individual and small business IRAs and 401k plans.