Market Beat: Array of options for business retirement plans
People who are self employed have several options available when choosing the type of retirement plan that they would like to establish.
One choice would be to use traditional or Roth IRA accounts and not set up a plan.
For this year, the IRA contribution limits are $6,000 for individuals, unless you’re over the age of 50, then there’s a catch up provision that allows an additional $1,000 for a total of $7,000. Traditional IRA contributions are tax deductible when made and Roth IRA contributions use an after tax dollar.
The main difference is that when retirement age is reached, the Roth distributions are income tax fee, while distributions form a traditional IRA are subject to income tax.
If the IRA contribution limits aren’t high enough, self-employed individuals can set up business retirement plans and there are some good choices. The 401k is probably the most common, but administrative costs can be high for business owners with a small number of employees. Self-employed people with no employees can always set up an owner only 401k.
One plan available to those with a small number of employees in known as a SEP, or Simplified Employee Pension. The contribution limits for a SEP are much higher. For 2019 you can put 25% of your compensation up to a maximum of $56,000 into a SEP. Employees have to be included and the same percentage of their salary must be contributed. Employees who have worked in any three of the last five years are eligible, but the employer can set up lower eligibility standards if they want, like anyone who has worked for one year is automatically eligible, for example.
The SIMPLE plan is another good option for small business owners with less than one hundred employees. SIMPLE stands for Savings Incentive Match Plan for Employees. The contribution limits for a SIMPLE plan are $13,000 for 2019 which is not as high as the SEP plan, but much higher than an IRA.
Most retirement plans today are defined contribution plans, but self-employed people can also set up defined benefit plans.
Defined benefit plans provide a set amount of pension income in retirement and can have some high contribution limits. With a defined contribution plan, you know how much you’re putting into the plan, but the amount that you’ll be able to take out as retirement income will depend on investment returns.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.