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Boston Small Business  |  Small Business Retirement Plans

Boston Small Business

Beacon Capital Management Advisors is located in Copley Square in Boston, Massachusetts and provides retirement plans to small business owners and to corporations in Massachusetts ranging from 1 to 1,000 employees.

Small businesses have an important decision to make when selecting the appropriate retirement plan and this information will help with your due diligence process. Contact us and we can help you establish the appropriate retirement plan.

The various retirement plans for small businesses can be broken down into two main groups.

1) Retirement plans for small businesses with W-2 employees.

Small business owners with full time employees generally select from retirement plans that fall into 3 categories.

  1. Retirement plans that are exclusively funded by the employer.
  2. Retirement plans that are employer and employee funded.
  3. Retirement plans that are exclusively employee funded .

Learn more about small business retirement plans available for small businesses with employees.

2) Retirement plans for a one person business, an owner and spouse business or a partnership (no W-2 employees)

Many independent contractors, entrepreneurs, self employed individuals and small business owners are in business for themselves and have no W-2 employees (other than themselves or their spouse) or have a partnership that employs only the partners and has no W-2 employees. Small business owners who fit this profile typically select the Individual 401k, SEP IRA, Defined Benefit Plan or SIMPLE IRA.

Massachusetts small business owners are often looking for ways to increase their tax deductions. One of the most significant tax deductions for a small business owner is to make a contribution to a retirement plan. Contributions into a retirement plan are generally 100% tax deductible and in 2015 can be up to $53,000 for a SEP IRA and potentially more in an Individual 401k or Defined Benefit Plan. Selecting the right small business retirement plan for your needs is primarily dependent on your income and on the amount of your desired annual retirement contribution. Each retirement plan benefits a business owner differently based on their income and depending on how much they would like to contribute each year.

For many successful small business owners the decision usually comes down to either a SEP IRA or Individual 401k due to the high contribution limits and flexible annual contributions. The 2015 maximum SEP IRA contribution limit is $53,000 and the Individual 401k contribution limit is $53,000 or $59,000 if age 50 or older. Because of the way the contribution is calculated a larger contribution usually can be made to an Individual 401k than a SEP IRA or SIMPLE IRA at the same income level. Only the Defined Benefit Plan can potentially allow a greater contribution than an Individual 401k, however a Defined Benefit Plan is much more expensive administratively and has mandatory annual funding requirements. As a result the Individual 401k is popular choice for small business owners who want the option of making a significant contribution and want the flexibility of completely discretionary contributions. A small business owner can increase, decrease or stop contributions to an Individual 401k each year.

A Defined Benefit Plan may be a good choice for business owners age 45 or older who would like to make retirement contributions in excess of the limits of an Individual 401k or SEP IRA. Depending on the age and income of the business owner annual contributions to a Defined Benefit Plan can exceed $100,000. Defined benefit plans are complicated and they require the services of an actuary to calculate the annual contributions and as a result they are the most expensive administratively. For business owners in a financial position to take advantage of the high contribution levels in a Defined Benefit Plan, the administrative expense may seem minimal relative to the tax savings.

A SIMPLE IRA is easy to setup and low administrative responsibilities, but has lower annual contribution limits so they may be a good choice for business owners with relatively lower incomes.

Another issue to consider is would you like to have the option of borrowing against your retirement plan by taking a loan. Of these self employed retirement plans only Individual 401k plans and Defined Benefit Plans are permitted by IRS rules to have a loan provision.

SEP IRA

Features:

  • 2015 SEP IRA contribution limit maximum is $53,000.
  • Easy to set up and minimal administrative responsibilities.

Disadvantages:

  • A Self Employed 401k may provide a larger contribution compared to a SEP IRA at the same income level.
  • For those age 50+ there isn't an additional catch-up provision like there is with the Individual 401k.
  • Loans are not permitted.

What are the advantages of a SEP IRA?

The SEP IRA has broad appeal due to its high maximum contribution limits and its ease to set up and maintain. The 2015 SEP IRA contribution limit maximum is $53,000. The annual contribution into a SEP IRA is based on a percentage of W-2 wages if you are incorporated or net income if you are a sole proprietorship. The SEP IRA is a great choice for self employed business owners who would like to contribute up to 25% of their W-2 wages or 20% of net self employment income.

S or C corporation or a LLC taxed as a corporation.

  • For incorporated businesses up to 25% of W-2 wages can be contributed into a SEP IRA.

Sole proprietorship, partnership or a LLC taxed as a sole proprietorship.

  • Annual contributions up to 20% of your net adjusted self employment income (or net adjusted business profits) can be contributed into a SEP IRA.

Learn more about a SEP IRA.

Individual 401k

Features:

  • 2015 Individual 401k contribution limit is $53,000 ($59,000 if age 50+ due to a "catch-up" provision).
  • Tax free loans are permitted with an Individual 401k plan. Loans are permitted up to 50% of the total value of the Individual 401k up to a maximum of $50,000.
  • Roth 401k - There is an option to make Roth 401k contributions with the salary deferral portion of the Individual 401k. Contributions into a Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½.

Disadvantages:

  • Potentially greater administrative responsibilities and administrative fees compared to a SEP IRA.

What are the advantages of the Individual 401k?

The Individual 401k and SEP IRA are popular because both plans have high contribution limits and have completely discretionary annual funding requirements. In 2015 a SEP IRA has a maximum contribution limit of $53,000 and an Individual 401k has a contribution limit of $53,000 ($59,000 if age 50+).

A SEP IRA is easier to setup and has less administrative costs than an Individual 401k, however an Individual 401k may allow a greater contribution at the same income level due to the way the contribution is calculated.

After tax Roth contributions can be made into an Individual 401k. Roth 401k contributions are not tax deductible, but are received tax free when withdrawn after age 59 ½. SEP IRA contributions can only be made pre-tax and does not have a Roth option.

Another important distinction between these retirement plans is an Individual 401k has a loan provision. IRS rules do not allow loans with a SEP IRA. Individual 401k loans are permitted up to 50% of the total 401k value with a $50,000 maximum.

Learn more about the Individual 401k.

Defined Benefit Plans

Features:

  • Depending on the age and income of the business owner, annual contributions can exceed $100,000 or more.
  • Loans may be permitted, however this may increase annual funding requirements.

Disadvantages:

  • More expensive to set up and to maintain.
  • Rigid annual funding requirements.

What are the advantages of a Defined Benefit Plan?

The Defined Benefit Plan is appropriate for those age 45 or older who wish to make tax deductible contributions in excess of the maximum limits of the Individual 401k or SEP IRA. Defined Benefit Plans offer substantial tax deductible retirement contributions and significant future retirement income. Depending on your age and income the annual contribution to a Defined Benefit Plan can exceed $100,000.

Defined Benefit Plans have greater administrative fees and more rigid annual funding requirements, but may be ideal for business owners who wish to shelter the largest percentage of their income and/or who want to make the largest retirement plan contribution permitted by IRS rules.

Learn more about the Defined Benefit Plan.

SIMPLE IRA

Features:

  • A SIMPLE IRA is easy to set up and has low administrative responsibilities.
  • 2015 SIMPLE IRA contribution limit is $12,500 or $15,500 if age 50+. In addition there is a maximum 3% employer contribution.

Disadvantages:

  • Relatively low maximum annual contribution limits.
  • Loans are not permitted.

What are the advantages of a SIMPLE IRA?

Self employed business owners that have a SIMPLE IRA are able to contribute up to 100% of their income up to the maximum contribution limits of $12,500 or $15,500 if age 50+. As a result, significant contributions can be made into a SIMPLE IRA even at lower income levels. A good candidate for this plan doesn't mind the relatively low maximum contribution limits. Self employed individuals who would like to contribute in excess of the limits of a SIMPLE IRA should consider an Individual 401k since it has higher contribution limits.

Learn more about the SIMPLE IRA.

Small Business Retirement Plan Options

Compare the key features of the SEP IRA, Individual 401k, Defined Benefit Plan and SIMPLE IRA.

  Individual 401k SEP IRA Defined Benefit Plans Simple IRA
Who is Eligible for this Retirement Plan?

Self employed individuals with no employees other than a spouse.

Sole Proprietors, LLCs, Partnerships, S and C Corporations.

Self employed individuals with no employees or small businesses with employees.

Sole Proprietors, LLCs, Partnerships, S and C Corporations.

Self employed individuals or small businesses owners with 5 or fewer full time employees.

Sole Proprietors, LLCs, Partnerships, S and C Corporations.

Companies with 100 or fewer employees.

Sole Proprietors, LLCs, Partnerships, S and C Corporations.

Key Retirement Plan Features

Provides benefits similar to a traditional 401(k) with less administration.

May permit greater contributions than SEP IRA, SIMPLE IRA or profit sharing plan without the rigid funding requirement of a Defined Benefit Plan.

Easy to administer, low-cost.

No IRS reporting required.

No annual funding required.

Employer must contribute to eligible employee accounts in any year that the plan is funded.

Provides the maximum allowable tax deductible retirement plan contribution.

Easy to administer, low-cost.

No IRS reporting required.

Largely funded by employee contributions, but limited employer contribution required.

Employee Contributions

Salary deferrals up to 100% of compensation up to $18,000 or $24,000 if age 50+ in 2015.

None

None

Up to 100% of compensation up to $12,500 or $15,500 if age 50+ in 2015.

Employer Contributions

Profit sharing contributions up to 25% of compensation.

2015 Individual 401k limit includes the salary deferral plus the profit sharing contribution with a combined limit of $53,000 or $59,000 if age 50+. 100% employer funded

100% employer funded

Up to 25% of compensation with a maximum of $53,000 in 2015.

100% employer funded

The annual contribution is calculated annually by an actuary.

Defined benefit plans provide the maximum allowable tax deductible retirement plan contribution.

Employer's have a mandatory match and must select from 1 of 2 matching formulas.

Match employee contributions dollar for dollar up to 3% up to a maximum of $12,500 in 2015 ($15,500 if age 50+).

A 2% match of employee compensation to all eligible employees regardless if the employee is electing to defer a portion of their salary or not (up to $5,300 in 2015). 

Required Administrative Filings and Responsibilities

Must file IRS Form 5500 when plan assets are greater than $250,000.

No employer tax filings.

Annually an actuary makes calculations to determine the amount that needs to be contributed into the plan to ensure the target retirement income goal is reached.

No employer tax filings.

Loan and Withdrawal Information

Tax free loans are permitted. 50% of the total 401k value can be borrowed up to a maximum of $50,000.

Withdrawals prior to age 59 ½ are permitted, but may be subject to a 10% penalty plus income taxes.

Hardship withdrawals are not permitted.

Loans are available if this feature is elected when the plan is adopted.

Receiving a loan may increase the annual required contribution.

Withdrawals prior to age 59 ½ are permitted, but may be subject to a 25% penalty if taken within the first 2 years of participating in a SIMPLE IRA. Also, an additional 10% penalty may apply for withdrawals prior to age 59 ½ in addition to ordinary income taxes.

Setup Deadlines

December 31st or fiscal year end.

Personal tax filing deadline if a sole proprietor plus extensions or the business tax filing deadline if incorporated plus extensions.

Must be set up by December 31st or fiscal year end.

Must be established by October 1st.

More Information

Learn more about the Individual 401k.

Learn more about the
SEP IRA.

Learn more about the Defined Benefit Plan.

Learn more about the SIMPLE IRA.

 

 

How Can BCM Help You?

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Disclosures:

*The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

*Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.