Here are some points to consider that may help you decide which type of retirement plan you want to explore. Scroll down or click on the links below to learn more
about each type of plan. Because sponsoring a retirement plan for your small business is a big step, you should consult with your financial advisor and CPA for advice
about which type is the best option for you and your business. Once you choose a plan type, you should call multiple companies to get pricing quotes specific to your
business.
If you have employees and want…
To set a vesting schedule that encourages employee retainment, check out a traditional 401(k).
To avoid nondiscrimination testing, so you and your highly compensated employees can aggressively save for retirement, think about a safe harbor 401(k).
A simple plan that allows your employees to make contributions, look into a SIMPLE IRA.
To choose which years you contribute to employee retirement accounts, for example, if your business profits fluctuate from year to year, consider a SEP IRA.
If you’re a sole proprietor and want…
To save as much money for retirement as allowed and contribute as both an employee and the employer, look into a solo 401(k).
To save as much money for retirement as allowed, but only want to make employer contributions, check out a SEP IRA.
For a simple retirement plan that’s easy to set up, consider a traditional IRA.
For a simple after-tax plan that allows your money to grow tax-free, look into a Roth IRA.
Key takeaway: Small businesses of all types have a wide range of employee retirement plans to choose from, including traditional 401(k)s, SIMPLE IRAs and solo 401(k)s.
Traditional 401(k)
This is perhaps the most well-known type of retirement plan. The difference between IRA and 401(k) plans is that 401(k)s allow employees to contribute a higher dollar
amount to their accounts, allow employees to take out loans from their retirement savings, and most offer employees a choice of pretax and Roth contributions.
Cost per employee. Varies by plan provider. Look for all-inclusive providers that work with small businesses. Most charge a setup fee, monthly (or annual)
administrative and per-participant fees, and an investment or advisory fee. Plan participants pay ETF and mutual fund expense ratios, as well as fund trades.
Contribution structure. Employee participation is optional and often allows them to choose to make pretax contributions through salary deferrals or after-tax Roth
contributions. Employer contributions are optional, but you can set a vesting schedule that allows you to reclaim a percentage of the business’s contributions if an
employee leaves the company before a set time.
Roth 401(k) vs. traditional 401(k). A Roth 401(k) is a variation of the traditional 401(k) that allows plan participants to make after-tax contributions rather than
pretax salary deferrals. After-tax contributions aren’t deductible, since you’ve already paid income tax on them. But the advantage is that your money grows tax free
so when you withdraw it, it isn’t taxed.
2021 contribution limits are $19,500 for employees, or $26,000 for employees age 50 and older. Employers can contribute up to 25% of the employee’s compensation, but
the contribution totals (employee and employer contributions) must not exceed $58,000, or $64,500 for employees age 50 and older who make catch-up contributions. This
plan, however, is subject to nondiscrimination testing, which ensures it doesn’t favor highly compensated employees. As such, the business owner and high-earning
employees may need to reduce their contributions to pass this test.
Type of filing. You’re required to submit an “Annual Return/Report of Employee Benefit Plan” – also known as IRS Form 5500 – with this plan. As mentioned in the point
above, this plan requires nondiscrimination testing.
Ideal for established small businesses who wish to use a vesting schedule to encourage talent retention or who prefer not to match or contribute to employee retirement
accounts.
Key takeaway: This is the most popular type of employee retirement plan. It allows employees to set aside pretax money to be invested in an account of their choosing.
Employer matching contributions are optional.
Safe Harbor 401(k)
A safe harbor 401(k) is a variation of the traditional 401(k) plan that isn’t subject to an annual IRS nondiscrimination test. This allows the business owner and
highly compensated employees to make maximum contributions to their retirement accounts. However, employers are required to match or contribute to employee retirement
accounts, and these funds are immediately 100% vested.
Cost per employee. Varies by plan provider, but those offering all-inclusive plans for small businesses tend to be less expensive. Most charge a setup fee, monthly (or
annual) administrative and per-participant fees, and an investment or advisory fee. Plan participants pay ETF and mutual fund expense ratios, as well as fund trades.
Contribution structure. Employee contributions are optional and, in most cases, they can choose between salary deferrals and Roth contributions. Employers are required
to either match 4% for participating employees or contribute 3% to all eligible employees. Employer contributions are 100% vested.
2021 contribution limits are $19,500 for employees, or $26,000 for employees age 50 and older. Employers can contribute up to 25% of the employee’s compensation, but
the total contribution (including employee and employer contributions) must not exceed $58,000, or $64,500 for employees age 50 and older.
Type of filing. Like the traditional 401(k), you’re required to submit IRS Form 5500 with this plan. Nondiscrimination testing isn’t required.
Ideal for small businesses whose owners and high-earning employees want to invest aggressively in their retirement accounts.
Key takeaway: This plan is similar to a traditional 401(k), however employer matching programs are required. Additionally, this plan is not subject to an annual IRS
nondiscrimination test.
Solo 401(k)
A solo 401(k) is a retirement savings plan designed for self-employed individuals who want to maximize their retirement contributions. It’s also referred to as an
individual 401(k) or i401(k). Only the business owner and his or her spouse may participate in this type of plan; business owners with employees do not qualify for it.
Fees vary, depending on the plan provider. Some charge a setup fee and have monthly or annual administrative and advisory fees. Others don’t charge these fees but
instead have ETF and mutual fund expense ratios and trading commissions. Some retirement plan providers require a minimum opening investment and charge service fees if
your account balance doesn’t meet a certain threshold.
Contribution structure. You can contribute to this account as both the employee and employer. A Roth option for the employee contribution may be available, depending
on the plan provider.
2021 contribution limits are $19,500 for the employee contribution, plus an additional $6,500 catch-up contribution for if you’re age 50 or over. The employer
contribution limit is up to 25% of your compensation. However, the total defined contribution limit, which includes both employee and employer contributions, is
$58,000 for 2021, or $62,000 with the catch-up contribution if you’re age 50 or older.
Type of filing. If your plan has $250,000 or more in assets, you must submit IRS Form 5500-SF or 5500-EZ. Because you don’t have employees, nondiscrimination tests are
not required.
Ideal for sole proprietors who wish to take full advantage of retirement savings opportunities.
