Which Retirement Plan Is Best for Your Business?October 13, 2015
Named after the section of the tax code that created them, traditional 401(k) plans are funded largely through employee payroll deduction. Employee contributions are made on a pretax basis, which reduces the participant’s taxable income. Investment returns potentially compound on a tax-deferred basis until qualified withdrawals, which are taxable, are made during retirement. Maximum employee contributions for 2015 are $18,000, plus a $6,000 catch-up contribution for those aged 50 and older. Employers may offer a matching contribution, which is tax-deductible by the business, although they are not required to do so. There is also the Roth 401(k), in which contributions are taxable but qualified withdrawals during retirement are tax-free.
SEP IRA and SIMPLE IRA
If you have employees and want a plan that’s relatively easy to administer, you may want to consider a SEP (simplified employee pension plan) IRA or a SIMPLE IRA. In general, employees who are expected to earn at least $600 in 2015, have worked for you for three of the preceding five years, and are age 21 or older are eligible to participate. The maximum annual contribution, which is tax-deductible, is up to 25% of compensation or $53,000, whichever is less.
SIMPLE IRAs are limited to companies with 100 or fewer employees earning at least $5,000 in the preceding year. Employees may contribute up to $12,500 in 2015, plus a $3,000 catch-up contribution for those aged 50 and older. There are two types of SIMPLE IRAs: a matching plan and a non-elective contribution plan. With a matching plan, the employer provides a matching contribution up to 3% of annual salary. With a non-elective contribution plan, employers contribute a fixed amount of 2% of an eligible employee’s salary (up to $5,000) regardless of whether the employee contributes.
Note that a SIMPLE IRA can be set up in conjunction with a 401(k) plan. If that is the case, employee contributions cannot exceed the $18,000 annual limit.
There’s more to learn. This is only an introduction to each of these plans. Ask your financial advisor to help you sort through the facts and select a plan or a combination of plans that fits your needs. You should also consult with your tax professional, who can help you determine which solution may be the most appropriate for your situation.
Whether you already have a plan or are planning to start one soon, you should know the AXA Association Business Solutions has partnered with National Small Business Association to meet your retirement planning needs. The program provides value-added services specifically designed for you, and simplifies the process of establishing a retirement plan with personalized service, full plan administration, and a diverse range of investment options.
If you would like more information about the NSBA Members Retirement Program, please contact a Retirement Program Specialist at 800-523-1125 dept 2167 or you can visit www.axa2plan.com.
* This article was contributed by Linda Lyons, Relationship Manager at AXA, an NSBA corporate partner.