BENEFITS

Growing BusinessBENEFITS

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  • Simple Small Business Retirement Plans

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    Are There Downsides to SIMPLE IRAs and SEPs?

    There are pros and cons to every business decision, including which employer retirement plan is right for your needs. Both plans impose a 10% early withdrawal penalty on withdrawals taken before age 59½. However, SIMPLE IRA withdrawals taken in the first two years after an employer first makes contributions to the account are subject to a 25% penalty.

    If you are considering a SIMPLE IRA, keep these points in mind:

    • Employee limitations. SIMPLE IRAs can only be implemented at companies with 100 or fewer employees. If you plan to grow your business beyond this cutoff point, you will have to transition to a different retirement plan down the road.
    • Total annual contribution limits. Contributions to a SIMPLE IRA count against the annual $17,500 IRS limit for qualified plans. If you contribute to a 401(k) through another business, your overall retirement contributions may not be as flexible.
    • Lower contribution limits than a 401(k). A SIMPLE IRA offers much higher contribution limits than a traditional IRA, but lower limits than a 401(k) plan.
    • Mandatory employer contributions. You must make certain contributions to employee accounts every year, even if your business has a bad year.
    • No loans or Roth contributions. All contributions are made on a pre-tax basis and taxable on withdrawal, and savings cannot be borrowed for other uses prior to retirement age.

    If you are considering a SEP IRA, keep these points in mind:

    • 100% employee inclusion. If you set up a SEP, all employees must be included if they meet certain IRS-defined eligibility requirements.
    • Equal contributions. Each employee must receive the same contribution as a percentage of salary. If you have more than a few employees, this may limit your ability to make large contributions for yourself.
    • Employer-only contributions. SEP IRAs are funded entirely by employer contributions.
    • No catch-up contributions. Because regular contribution limits are so high, employees age 50 and over cannot make additional catch-up contributions.
    • No loans or Roth contributions. All contributions are made on a pre-tax basis and taxable on withdrawal, and savings cannot be borrowed for other uses prior to retirement age.
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    Before you add a retirement plan to your employee benefits package, talk to your tax professional and financial advisor about the pros and cons of different types of pension plans, including the SIMPLE IRA and SEP IRA. They can help guide you to the plan type that offers the most upside for your business.