Small Business retirement plans
If you are a small business owner and want to start a retirement plan, here are two plans you might want to consider: the SEP IRA and the SIMPLE IRA.
SEP IRA (Simplified Employee Pension Plan – IRA)
Eligibility: Any business owner or self-employed individual can start a plan. All employees who have worked for 3 of the past 5 years and who earned at least $450 last year are eligible for coverage. Funded by tax-deductible employer contributions. Employees cannot contribute.
Contribution limits: 25% of compensation up to $44,000 if you are an employee of your own corporation; 20% of self-employment income (if self-employed) up to $44,000. Vesting is immediate (there is no waiting for “ownership” of contributions). Contributions do not have to be made every year.
SIMPLE IRA (Savings Incentive Match Plan for Employers – IRA)
Eligibility: Employers with 100 employees or less who do not maintain any other retirement plan can start a plan. Employees are eligible to participate if they have earned more than $5,000 in any two years prior and who will earn at least $5,000 this year. Employees can contribute up to $10,000.
Employer can provide up to 3% match or 2% non-elective match for all employees up to $4,400 per employee. An employer can contribute $10,000 to his/her own account plus a match of 3%. Additional contribution by employee of $2,500 if age 50 or older. Vesting is immediate (there is no waiting for “ownership” of contributions).
What is one important difference between these plans? In the SEP IRA, the employer makes the contribution. In the SIMPLE IRA, the employee makes the contribution but there is an employer match.
Grant Schultz of VersaLand is an Iowa State University College of Agriculture Alum, and an expert in Agricultural 1031 Exchanges for estate planning. He can be reached at (319)277-1199 or at www.VersaLand.com
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