Choosing a retirement plan is a big decision, even if you are only choosing one for yourself. When you are also impacting the retirement plans of your employees, stakes are even higher. With many options from which to choose, deciding which corporate retirement plan you should select can seem daunting. In this article, we’ll lay out the 5 types of retirement plans (and the major details of each) to help you make the right decision for you, your employees, and your business.
401(k)
The most well-known corporate retirement plan is the 401(k). This plan involves the employer contributing on behalf of employees in order to pass the testing required for the owner to contribute, and has significant administrative and recordkeeping requirements. If you are running a more mature company that has the resources for this type of plan, it may be a good fit for your employees. Up to $19,500 may be deposited into a 401(k) plan for the year (data based on the maximum contribution for 2020.)
401(k) Individual
This plan is similar to the 401(k) plan but involves reduced top-level testing. It tends to be less expensive than a normal 401(k), but only companies whose employees are all owners or immediate family members qualify.
Defined Benefit Plan
According to Accounting Web, defined benefit plans have been on a decline in recent years. However, there are situations in which this is still the best option for a company. If the business has only owners (or only owners and immediate family members,) or the owners are much older than the employees, this plan may be beneficial. It allows the employer to take a large tax deduction and provide owners with a hefty benefit for their retirement.
SEP IRA
If you’d like to put a large percentage of your and your employee’s income into a retirement plan, but don’t want to have to go through qualification for a 401(k) plan, a SEP IRA may be right for you. A SEP IRA allows up to 25% of the account holder’s income to be saved for retirement. Please note that whatever percentage you pick will apply to all employees. You can also have employees wait two years to become eligible for the SEP IRA program.
SIMPLE IRA
A SIMPLE IRA is similar to a 401(k) in that employees can contribute up to 100% of their income to the plan. However, the maximum for a Simple IRA is lower than that of a 401(k,) at $13,500 per year. (as of 2020) Employers who offer SIMPLE IRAs typically match 3% of an employee’s salary that is contributed to the plan. A SIMPLE IRA is easier to establish, with less administrative burden on the company.
Choosing the right retirement plan for your company can be a daunting task, but with the right information, making the right decision for you and your employees becomes much simpler. For further information on options for corporate retirement plans, please consult the IRS website here.
If you’d like to talk with a professional regarding which is the right option for you, contact us at 310-534-5577 or [email protected] and we’d be happy to refer you to someone we know and trust.
