Tax Strategies for Business Owners

A retirement plan can do two jobs at once for a business owner: it builds your own nest egg and reduces your current taxable income. It can also help you attract and keep employees. Several plans are designed for small businesses, and they differ in cost, complexity and how much you can put away.

SEP IRA

A Simplified Employee Pension is easy to set up and maintain. Generally the employer makes the contributions, and if you contribute for yourself, you must contribute the same percentage of pay for eligible employees. There is little paperwork, and contributions are flexible from year to year. It suits owners with no employees or only a few.

SIMPLE IRA

Designed for smaller employers, a SIMPLE IRA allows employees to contribute from their pay, while the employer makes either a matching or a fixed contribution. Administration is lighter than a 401(k), but the contribution limits are lower and there are rules about who can have one and how long employees must be allowed to participate.

Traditional 401(k)

A 401(k) offers higher contribution limits and features such as employee deferrals, employer matches or profit-sharing, Roth options and sometimes loans. It also carries more administration, plan documents, testing and annual reporting, though safe harbor designs can ease some of the testing. A 401(k) often makes sense for businesses with higher income or owners who want to save more.

Solo 401(k)

For owners with no employees other than a spouse, a solo 401(k) allows contributions as both employee and employer, which can produce a high savings capacity for a one-person business. Reporting requirements begin once plan assets reach a threshold set by the IRS.

Defined Benefit Plans

These plans promise a set retirement benefit and can allow substantial deductible contributions, particularly for older, high-earning owners. They require an actuary, commitment to funding and greater costs, so they are for specific situations.

Profit-Sharing Plans

Employer-only contributions, flexible from year to year, with allocation formulas set by the plan. Often combined with a 401(k).

What to Weigh

• How much you want to save each year.
• Whether you have, or plan to have, employees and what contributing for them will cost.
• Setup and administrative costs.
• Deadlines for establishing a plan and funding it.
• Vesting and rules on loans and withdrawals.

Contribution limits and tax credits for starting a plan change over time, so check current figures at irs.gov or ask us. The tax advantages work best alongside a sound overall financial plan; see our tax planning services.

To choose a plan that fits your business, contact our firm.