Inexpensive retirement plans for small-business owners

By Investing Across Borders, for USA Today

You’ve built your own company from the ground up, and now it’s time to start thinking about a retirement plan for yourself and your employees.

“There is really no age requirement for setting up a small business retirement plan,” says Karen Shapiro, CEO of Dedicated Defined Benefit Services. “We have clients ranging from dentists to truckers.”

The good news is that there are several plans available to small-business owners from IRAs to 401(k)s to cash plans and pensions. And you could get a tax credit of up to $500 just to set up the plan! But where do you start?

  • Is it just you or employees too? The first thing is to decide who you want to cover. Is it just you and your spouse? Do you have a business partner? Or do you also plan to offer the plan to employees? How many employees?
  • Cost. The cost of setting up a plan can be minimal, such as in MyRA or SEP IRA, or a few thousand dollars or more to establish and maintain a 401(k) or a pension.
  • Contributions. Do you, as the employer, plan to make all the contributions to the retirement plan, or do you want the employees to contribute, or do you want to share the contributions between the company and the employee?
  • Motivation. Why are you setting up a retirement plan in the first place? Is it to shelter money from the IRS for you and your employees until a certain point? Or is it to attract new employees and offer a retirement benefit to existing employees?

Data show that only about half of American workers participate in a retirement plan, whether that is a 401(k) or a pension. See chart below. And the failure of small businesses are part of the problem.

Below is a list of seven types of popular retirement plans for small business owners, ranked in order from the simple and least costly to the more complex and expensive:

  • MyRA: If you have no other retirement plan, and you don’t expect to contribute much, this is the account for you. Designed mostly for young savers and the self-employed, you can open an account for as little as $25 and contribute as little as $2 at a time. A key advantage is you can take your money out with no penalties, although you’ll pay tax on the earnings you withdraw if you take it out before you’re 59-½. Two caveats: You can’t invest more than $15,000 total, and your investments are limited to government bonds. The returns aren’t much, but at least it usually beats inflation.
  • SEP IRA: For small-business owners and for self-employed people, the SEP IRA is a no-cost, easy-to-set-up retirement plan. You can contribute any amount each year – up to $54,000 in 2017 – but you must contribute the same percentage amount to yourself and to other employees as well. Contributions are made by the employer only and are tax-deductible as a business expense.
  • SIMPLE IRA: For businesses with less than 100 employees, these plans are designed for both the employer and the employee to contribute to the employee’s retirement. As with SEP IRAs, employer contributions are tax deductible, and employees’ contributions can be made pretax and in 2017 were limited to $12,500. Costs and paperwork are minimal. Charles Schwab, for example, charges no fees to open a SIMPLE IRA, but Schwab and other financial companies tend to make up for whatever account fees they waive by commissions on trades and fund management fees.
  • SIMPLE 401(k): Similar to the SIMPLE IRA in terms of its characteristics and setup costs. The main difference is you and your employees can take out loans from their 401(k) balance.
  • Sole 401(k): Also known as the Self-Employed 401(k), this plan is just for the business owner and not for your employees. The paperwork is higher than the above plans. You’ll have to file a Form 5500 with the IRS if your plan assets exceed $250,000. The good thing is that many financial service firms will not charge a setup or maintenance fee other than on the account itself. Plus, you can contribute salary deferrals of $18,000 and total contributions of $54,000 in 2017.
  • Pension/defined benefit: The old-fashioned pension plan may be the best plan for ensuring a comfortable retirement and for attracting job applicants to your firm. The problem with these plans is the cost and paperwork involved. For a small firm, Karen Shapiro charges about $1250 for setting up the account and an additional $150 for each person in the plan, plus an annual fee of $1950. The benefits of this plan for the employee is that the employer takes on all the investment risk.
  • Cash balance plan with 401(k): The cash balance plan is a type of defined benefit plan but when combined with a 401k this retirement plan could be beneficial to small business owners who can afford the costs of both. It offers both employer contributions as well as employee contributions, and it allows both parties to manage the investments.

The key is to know what is best for you and your firm. "Is ease of administration an important consideration? Is it critical that employees be able to contribute to the plan?” says Ken Hevert, vice president for financial products at Fidelity. “Knowing what you want and need ahead of time is a key component, because each plan has its advantages and disadvantages."

Michael Molinski is a New York-based economist and writer, and a former retirement editor at Fidelity Investments and a former journalist at MarketWatch and Bloomberg.