The Basics of Retirement Planning for Small Business Owners

If you’re self-employed or own a small business and you haven’t established a retirement savings plan, it’s time to get started. By establishing a plan, you help yourself – and your employees – get started saving for retirement. Different plan designs offer different options. It’s important to understand these options so that you can select the plan most appropriate for you.

Some retirement plans are IRA-based like Simplified Employee Pensions (SEP) and SIMPLE IRAs. The deposits made to these plans are held in individual retirement accounts. True qualified plans, like 401(k)s, profit-sharing plans and defined-benefit plans, are subject to ERISA* rules and held in a trust account by an administrator.

Qualified plans are generally more complicated and expensive to maintain than IRA-based plans because of the ERISA laws. With an IRA-based plan, your employees own their contributions immediately. However, with qualified plans, you can require that your employees work a certain number of years before they are able to remove the employers’ contributions.

Each plan type has unique advantages and disadvantages, so you’ll need to clearly define your goals before selecting a plan. For example, do you want to maximize the amount you can save for your own retirement? Do you want to establish a plan funded by employer contributions, employee contributions or both? How about the flexibility to skip employer contributions in some years? Or what about finding a plan with the lowest costs or easiest administration?

The answers to these questions can help guide you and your retirement professional to the plan or combination of plans most appropriate for you.