Small Business Owners: Act Fast To Open “SIMPLE” Retirement Plans

If you are a small business owner with no retirement plan in place, you have until October 1 to cut your tax bill and play retirement catch-up by setting up a SIMPLE-IRA retirement savings account for 2018.

Opening a plan by the deadline will let you contribute and deduct a full year’s retirement contribution for 2018. A SIMPLE-IRA has much higher contribution limits than a Traditional IRA account.

Here’s the lowdown:

Who should consider a SIMPLE-IRA plan? Any type of business, including self-employed persons who operate as sole proprietors, can open a SIMPLE plan, but it really makes sense for small businesses with employees. (Small businesses or self-employed persons without employees are better off opening an Individual 401k).

What does it cost to set up this plan? This is a free plan that requires no testing or annual accounting (yes, it was named SIMPLE for a reason!). It doesn’t get any better than that!

Do I get a tax deduction? Of course. A SIMPLE is funded by salary deferrals, just like a 401(k). If your employees choose to defer part of their salary into the SIMPLE accounts you set up for them, you still deduct the salaries paid and they don’t pay tax on the portion deferred. If you, as the owner of the business, also take a salary, you can defer up to $12,500 per year of your salary ($15,500 if age 50 or over) and not pay tax on it.

What does the employer have to contribute? Not much. A SIMPLE IRA is funded, for the most part, by employee and not employer contributions. The owner has to match employee contributions, up to 3% of salary, but only for employees who actually contribute to the plan. Employer contributions never exceed the amount contributed by the employee. That’s why the SIMPLE is one of the best plans for employers.

So what can I gain? Here’s an example. Christine and Greg run a small business, where they both work. They are in their 50s and are afraid they’ll never retire! They pay too much in tax and can’t seem to save regularly.

With a SIMPLE-IRA, they can deposit $31,000 into their retirement investment accounts and cut that amount from their taxable income this year for an immediate tax savings. They also “match” their own contributions up to 3% of salary, which amounts to another $4,500, based on salaries of $75,000 for each. That money gets put into their SIMPLE accounts, which they invest however they want, and will grow tax-deferred for many, many years until they decide to withdraw it.

Only one of their employees decides to participate, and saves $200 per month from her annual salary of $40,000. Their contribution to the employee’s account will be $1,200 (3% of salary). No contributions are required for the other two employees, who choose not to participate.

Look what Christine and Greg have accomplished. They set up a plan that helps employees save for retirement, and provide a “match” for employees who participate. They cut thousands from their taxes and boost their retirement nest egg. And since the SIMPLE is funded largely by employees, not employers, almost 97% of contributions, in this example, flow directly into Christine and Greg’s own accounts.

Not bad for a day’s work!

The Takeaway: In today’s workplace, only one person can be responsible for your retirement security, and that’s you. If you are behind the savings curve, it’s time to catch up. Get advice from a Certified Financial Planner or other competent advisor about smart ways to save for the future and cut your taxes at the same time.


About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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