There are several different 401(k) and IRA retirement plan options that allow for the same tax treatment as a 401(k), but each has different contribution limits and costs. The different options a business owner should consider include several different 401(k) types, the SIMPLE and SEP IRA, and defined benefit (pension) plans.
Does your business have employees?
If your business has employees, you will want to consider either a 401(k) plan or a SIMPLE IRA. The type of 401(k) plan you choose will be determined by several factors, including cost and if you want to make employee contributions. If you do not want to contribute towards a retirement plan for your employees, you should consider a traditional 401(k), which allows for discretionary employer contributions, subject to testing. Businesses with more than 100 employees making over $5,000 should consider a SIMPLE 401(k) or SIMPLE IRA, because they are easier to set up than traditional 401(k)s. Employers with less than 100 employees should consider a Safe Harbor 401(k). If your business has no employees, move on.
Do you want to contribute more than $56,000 in a retirement account?
If you answered yes and you are an older business owner, you should consider a defined benefit pension plan, which would allow much higher contribution amounts than any 401(k). If you plan on contributing less than $56,000 annually, move on.
Are you looking to contribute more than 25% of your net compensation?
If you are, you should consider a Solo 401(k). This allows you to contribute up to 100% of compensation or $56,000 (plus catch-up contributions). If you will be contributing less than 25% of your net compensation, a SEP IRA would allow the same benefits as a Solo 401(k) but with less administration costs.
To learn more about the best retirement plan options for your business, check out this flowchart (link).
If you would like to schedule a call see what retirement plan would be optimal for you as a business owner, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail email@example.com.
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