Retirement plans help business owners save for retirement and attract the most talented employees. There are 6 main types of small business retirement plans that allow pre-tax contributions each year by employers and/or employees. Each type differs widely, ranging from $5,500 – $55,000+ in annual contributions, with some requiring employer contributions or match.
When you’re a solopreneur or a small business owner with a dozen full-time employees, one of the 6 retirement plans will be right for you. Once you pick a plan, choose a reputable provider to help with implementation and administration. One of the best providers for retirement plans for small is Human Interest. Human Interest’s technology allows it to streamline plan administration and generate cost savings for small business owners.
6 Types of Small Business Retirement Plans
|Traditional 401(k)||Business owners with more than 8 employees who all want to contribute|
|Safe Harbor 401(k)||High-earning employers who have more than 8 employees and want to contribute more than a traditional 401(k)|
|Solo 401(k)||Self-employed business owners, especially if you want to invest in alternative assets like real estate or may hire employees later|
|SIMPLE IRA||Small business owners who want the structure of a 401(k) at a lower cost but with lower contribution limits|
|SEP IRA||Business owners with less than 3-5 employees who are willing to fund all employee contributions|
|Traditional IRA||Independent contractors who want to save a little for retirement each year|
1. Traditional 401(k) for Companies with 8+ Employees
With over 54 million Americans participating in more than 550,000 plans, 401(k)s are probably the most well-known type qualified retirement plan. In a 401(k), employees can contribute up to $55,000 pre-tax each year through salary deferrals, employer matching, and profit-sharing. Employers are not required to match or profit-share if they don’t want.
401(k)s best for employers who want flexibility and who have more than 8 employees. This is because the higher administration cost nets out to a positive once a company passes this mark. Other options, like SIMPLE IRAs and SEP IRAs, either have fewer contribution options/limits or require some sort of employer match or contribution, making it more expensive for growing companies. However, remember that 401(k)s have the highest administrative costs overall, and the IRS requires annual testing to ensure your plan is fair to employees.
Traditional 401(k) Costs
The per-participant cost of a Traditional 401(k) is usually higher for small businesses than larger, established companies. According to Human Interest, businesses with 10 employees will pay about $2,000 annually for administration. Mutual funds within the plan will also have expense ratios between 0.15%-1% and equity trades also have fees, both of which are paid by employees and deducted automatically by the funds.
Typical 401(k) Costs include:
- Plan administration fee (0.25%-2% annually) – Very few 401(k) plans are self-administered. It’s best to hire a third-party administrator to oversee the plan, provide annual compliance testing, and file your annual Form 5500. Plan administration cost usually has a per-plan base rate, plus a per-participant charge.
- Custodian fee (0.25% of plan assets) – Companies that hold 401(k) accounts often charge a separate fee for holding plan assets. The charge can be a fixed cost or based on plan assets. However, it should not exceed 0.25% of plan assets. The expense for custodying plan assets may be offset against investment fees.
- Advisor fee (0.5-1.5% of plan assets) – If you use a financial advisor to provide advice on specific investments, you’ll pay an additional fee to the advisor based on plan assets. These fees start at a fraction of a percent per year and can go up to nearly 2% per year, though sometimes they’re partially covered by investment fees.
- ETF and Mutual Fund Expense Ratios (0.25%-2% of amount invested) – Investment options within a 401(k) have their own fees that are automatically deducted from the fund as expense ratios. These fees can sometimes be used to help offset other costs.
- Recordkeeping (0.15% and 1% of plan assets) – Recordkeeping for a 401(k) is often included in plan administration services. All employee deposits, disbursements, employer contributions, and plan expenses must be tracked and reported. Historically recordkeeping fees have been fixed, but more sponsors have lately been shifting to asset-based fees between 0.15% and 1%.
- Trading Commissions ($5-$10 per trade) – If you have a brokerage option in your 401(k) to trade stocks and bonds, you’ll pay at least $4.95 per trade for US equities and $1 per bond for US bond trades
Traditional 401(k) Contributions & Matching
Unlike some IRA alternatives, 401(k) contributions come from both employers and employees. Contributions are a combination of employee salary deferrals, employer matching, and profit-sharing payments by employers when they choose to contribute.
Traditional 401(k) Contribution Limits 2018
For 2018, employees can have up to a total of $55,000 in a 401(k) plan. Of this total, $18,500 is from salary deferrals, with another $18,500 from employer matching. The remaining $18,000 is through employer profit-sharing contributions. An additional $6,000 in catch-up contributions are allowed for employees over age 50, for a total of $61,000.
Traditional 401(k) Matching
Of all small business retirement plans, Traditional 401(k)s offer employers the most flexibility for matching. Employers can structure any matching formula they want (including profit-sharing) – or not match at all. It’s common for employers to suspend matching when the business is facing a downturn. Whatever you decide, matching guidelines need to be included in the plan documents and followed carefully.
Traditional 401(k) Rules and Deadlines
The IRS has a strict process for setting up a 401(k). The effective date of a plan can be anytime, but employers must adopt the plan during the same tax year for which the plan is effective. The specifics of a plan must be included in plan documents that the employer drafts, adopts, and follows.
Unlike Safe Harbor or Solo 401(k)s, Traditional 401(k)s are subject to “nondiscrimination testing”, which is an IRS test to ensure that plan assets don’t become too concentrated among company owners and highly-compensated employees. This testing must be conducted annually, with corrective action taken before year-end if the plan is not in compliance. Additionally, Form 5500 must be filed annually with the IRS.
Traditional 401(k) Pros & Cons
Traditional 401(k)s have a number of benefits and drawbacks for small business owners to consider when deciding if 401(k) may be their best option.
Traditional 401(k) Pros
Traditional 401(k)s have a number of advantages including:
- Structure your own matching – You can create any formula you want for matching employee deferrals, but you aren’t required to match at all
- Change your match – If your business enters a slowdown, you can change or skip your match as needed
- Set eligibility requirements – You get to determine who is eligible for your 401(k). For example, you might require employees to be at your business for at least a year before they qualify.
- Employer contributions can be vested over time – If you’re worried about employees leaving early, you can set up a schedule to vest their matching and/or profit-sharing over time, rather than immediately
- Brokerage options – In addition to a selection of mutual funds, many providers allow you to create a brokerage option in your 401(k) to allow participants to trade in stocks or bonds
- Lending facility – This is one of the biggest advantages of a 401(k). While it’s generally impossible to borrow against IRA assets, many providers can help you build a borrowing component into your plan to allow you to borrow up to $50,000
Traditional 401(k) Cons
In addition to their benefits, there are a number of downsides to Traditional 401(k) plans that include:
- Higher costs – The administrative and recordkeeping costs for a 401(k) are much higher than IRA alternatives
- Annual compliance testing – Part of administering a 401(k) plan involves testing the plan annually to make sure your plan doesn’t disproportionately benefit higher-earning employees.
- Non-compliant plans must be corrected – Failing one of these tests can mean that you need to make contributions on behalf of low-earning employees or make corrective distributions to bring your plan back in balance. Thankfully, using a service such as Human Interest means that they will help keep you compliant.
- Annual filing – Each year you must file a Form 5500 for your 401(k) plan.
To read more about Traditional 401(k) costs from different providers, check out our article on the 6 Best 401(k) Companies for 2018.
Where to Find a Traditional 401(k)
401(k) plans can be provided by Professional Employer Organizations (PEOs) like Justworks, HR benefits software including Gusto, or independent retirement providers like Human Interest, which uses technology to offer a low-cost administration service. Check them out today for more information.
2. Safe Harbor 401(k) for High Earning-Employers
One growing trend among retirement benefits is qualifying 401(k)s for Safe Harbor. Safe Harbor 401(k)s have the same contribution limits as 401(k)s but make maximizing contributions easier because Safe Harbor 401(k)s are exempt from annual compliance testing that sometimes causes plan assets to be returned to high-earning employers, increasing their tax bill and reducing the amount they’re putting away for retirement.
To qualify for Safe Harbor, employers must match at least 4%. Safe Harbor 401(k)s are best for businesses that have high employee turnover or too many plan assets among owners or highly-compensated employees. These businesses run the risk of violating annual compliance testing with a traditional 401(k), but are exempt if they qualify their plan for Safe Harbor – making it easier for owners and high-earns to contribute more.
Safe Harbor 401(k) Costs
The costs of a Safe Harbor 401(k) are similar to a Traditional 401(k). Both require plan administration, bookkeeping, and annual Form 5500 filings. Many providers actually offer cost savings for Safe Harbor 401(k)s because there is no requirement for annual compliance testing. However, employers do have added costs of higher matching.
The typical costs of a Safe Harbor 401(k) include:
- Plan administration fee (0.25%-2% annually) – Administering the plan, overseeing deposits and disbursements, preparing and filing the annual Form 5500. The fee sometimes has a per-plan rate, plus a per-participant charge.
- Custodian fee (0.25% of plan assets) – Financial institutions that hold 401(k) accounts sometimes charge a standalone fee for holding plan assets. The fee can be either fixed or based on plan assets but should be no more than 0.25% of total plan assets. This fee may be included in other charges or credited against investment fees.
- Advisor fee (1% of plan assets) – If you choose to use a financial advisor to provide specific investment advice, you’ll typically pay an additional fee based on plan assets. These fees can start at a fraction of a percent per year and go up to nearly 2% per year, though they are sometimes partially covered by investment fees.
- Investment fees (0.25% to over 2% of plan assets) – Specific investment options within a 401(k) charge their own expense ratios that are automatically deducted from the fund. Depending on the structure of a plan and providers used, these fees are sometimes used to help offset other costs.
- Recordkeeping (0.15% and 1% of plan assets) – Plan recordkeeping is often included with plan administration services and covers the basic bookkeeping for a plan. Deferrals, disbursements, employer contributions and expenses are tracked for proper reporting. Fees for this service have historically been fixed-cost, but recently more sponsors have been shifting to asset-based fees between 0.15% and 1%.
Safe Harbor 401(k) Contributions & Matching
Safe Harbor and Traditional 401(k)s have the same contribution structure. Contributions consist of employee deferrals, matching, and discretionary profit-sharing contributions. However, it’s much easier to maximize contributions in a Safe Harbor 401(k), especially for owners and highly-compensated employees who can be hindered by Traditional 401(k)s with annual compliance testing.
Safe Harbor 401(k) Contribution Limits 2018
Using a Safe Harbor 401(k), employees can contribute a maximum of $55,000 per year. $18,500 of that total comes from deferrals, plus another $18,500 in matching. The final $18,000 comes from profit-sharing contributions that are discretionary for the employer. An additional $6,000 if allowed for employees aged 50 or over.
Safe Harbor 401(k) Matching
For a 401(k) to be eligible for Safe Harbor, employers must satisfy certain requirements. These include structuring either an elective or nonelective employer contribution program that meets certain minimums.
The two options for employer contributions include:
- Elective contributions – If matching employee deferrals, employers must effectively match employee deferrals up to 4% This can be achieved by either matching 100% deferrals up to 4% or matching 100% up to 3%, then 50% up to 5%.
- Non-elective contributions – Employers can make contribute 3% of every employee’s annual pay to their respective accounts, regardless of whether employees contribute themselves.
Safe Harbor 401(k) Rules and Deadlines
The biggest difference for Safe Harbor vs Traditional 401(k)s is that Safe Harbor plans are exempt from nondiscrimination testing. Also, Safe Harbor 401(k)s can’t be active less than 3 months of the year, so they must be adopted before October 1. Form 5500 filing requirements are no different.
Safe Harbor 401(k) Pros & Cons
As a subset of 401(k)s, Safe Harbor 401(k) plans have their own benefits and drawbacks relative to Traditional 401(k)s and IRA alternatives.
Safe Harbor 401(k) Pros
Safe Harbor 401(k)s have a few special advantages including:
- Exemption from compliance testing – Unlike Traditional 401(k)s, Safe Harbor plans are not subject to annual nondiscrimination testing
- Cost savings – Because Safe Harbor 401(k)s are exempt from testing, they typically incur cost savings in plan administration
- Easier to maximize contributions – In Traditional 401(k) plans, nondiscrimination testing can make it hard for highly-compensated employees to maximize their contributions. In Safe Harbor plans, participants are not hindered by plan compliance concerns
Safe Harbor 401(k) Cons
There are also a few drawbacks for Safe Harbor 401(k)s including:
- Higher required matching – In order to qualify a 401(k) for Safe Harbor, businesses must institute higher employer contribution programs
- Profit-sharing still gets tested – The profit-sharing component of Safe Harbor 401(k) plans is still subject to annual nondiscrimination testing
For more information on Safe Harbor plans, check out our detailed guide on Safe Harbor 401(k) plans and nondiscrimination testing.
Where to Find a Safe Harbor 401(k)
Like a Traditional 401(k), Safe Harbor 401(k)s can be provided by PEOs like Justworks, HR benefits providers like Gusto, or independent administrators like Human Interest. For more information on these plans, contact Human Interest for more information.
3. Solo 401(k) for Single-Member Businesses
Solo 401(k)s are for businesses that have no full-time employees because only the business owner and their spouse can participate. Otherwise, Solo 401(k)s are like Traditional 401(k)s, with the same contribution limits but virtually no administration cost. Solo 401(k)s can invest in real estate and other alternative assets through certain providers.
Solo 401(k)s are ideal for solopreneurs or independent contractors, particularly those who are interested in investing their retirement savings in alternative assets. It’s also great for single-member businesses that expect to hire employees in the future because a Solo plan will convert to a traditional 401(k) when the first employee is hired.
Solo 401(k) Costs
In contrast to other 401(k)s, Solo 401(k)s can be structured through a mutual fund company or online brokerage firm with no administration cost.
The typical costs of a Solo 401(k) include:
- Mutual fund expense ratios (0.03%-1.5%) – Whenever you invest in mutual funds, the funds charge expense ratios that help to cover managing and trading costs. Even if you set up your Solo 401(k) directly through a mutual fund company
- Trading Commissions ($5-$6 for US equities or ETFs, $1/bond trades) – If you set up your Solo 401(k) through an online brokerage, you’ll be charged fees whenever you trade in your account
- Administration Fees ($200-$2,000) – If you establish a self-directed account through an alternative provider, you’ll pay additional administration costs. However, you’ll also get far more investment flexibility
Solo 401(k) Contributions & Matching
Solo 401(k)s theoretically have the same contribution structure as other 401(k)s – with deferrals, matching, and profit-sharing. However, in a Solo 401(k) the employer and employee are the same person, so contributions are generally consolidated and considered profit-sharing. Therefore, you can contribute up to $55,000 ($61,00 with catch-up contributions), each year.
Solo 401(k)s only have one participant – the business owner – so they don’t have matching. This is a huge benefit of Solo 401(k)s compared to SEPs for solopreneurs who eventually want employees. In a Solo 401(k), you can hire employees later without having to fund their contributions yourself – your Solo 401(k) simply converts to a Traditional 401(k) and you don’t have to match.
Solo 401(k) Rules and Deadlines
Solo 401(k) plans can only be used by small businesses that do not have any full-time employees. Business owners have until their tax filing deadline to make Solo 401(k) contributions (prior year contributions are allowed). Form 5500 EZ must be filed if plan assets exceed $250,000.
Solo 401(k) Pros & Cons
Solo 401(k)s are only available for businesses that have no full-time employees and offer special benefits as well as some distinct drawbacks.
Solo 401(k) Pros
Benefits of a Solo 401(k) for the self-employed include:
- Tremendous flexibility – Solo 401(k)s offer far great ability to trade in stocks and bonds or invest in alternative assets
- Possibility for checkbook control – Through some providers, you can get checkbook control for your Solo 401(k) for even more investment options
- Minimal administration costs – Unlike other 401(k)s, Solo 401(k)s cost almost nothing to administer unless you use an alternative provider
- Scalable – Solo 401(k)s can be easily converted to regular 401k if you hire employees later
- Credit facility – Unlike IRA alternatives, it’s possible to borrow against assets in a Solo 401(k)
Solo 401(k) Cons
There are also downsides to Solo 401(k)s including:
- Limited to 1 participant – As the name indicates, Solo 401(k)s are only available to businesses without employees and can have only one participant
- Must follow defined setup process – Even though Solo 401(k)s only have one participant, business owners still have to go through the formal process of establishing a plan
For more information on how a Solo 401(k) works, check out our ultimate guide on Solo 401(k) Individual 401(k) rules, limits, and deadlines.
Where to Find a Solo 401(k)
Solo 401(k)s providers include a number of financial service companies and online discount brokers. One of the best low-cost providers is Vanguard, the largest mutual fund company in the world. For more information on where to find, check out our article on the best Solo 401(k) providers.
4. SIMPLE IRA as an Inexpensive Alternative
A SIMPLE IRA, sometimes called the poor man’s 401(k), is a great option for small businesses with under 100 employees. It allows employees and employers to make pre-tax (or tax-deductible) contributions. It’s also one of the easiest retirement plans to set up, has no IRS filing requirements and minimal service fees. However, the maximum contribution limit is $25,000.
SIMPLE IRAs are best for employers who want to contribute $6,000-$25,000 per year and have 5-15 employees, some of whom want to make salary deferrals. Companies with more than 15-18 employees – or business owners who want to contribute more than $25,000 per year – typically find more benefit from Traditional or Safe Harbor 401(k)s. If you don’t want to contribute more than $6,000 per year, you’ll be better off with a Traditional IRA.
SIMPLE IRA Costs
SIMPLE IRAs generally do not have administration fees, although some providers like charge a fee for account maintenance or custody. Vanguard, for example, charges $25 per year for each fund used in a SIMPLE IRA. Additionally, you can purchase software like Gusto to manage withholdings and deposits.
Aside from these small charges, the other expenses for a SIMPLE IRA include:
- Trading Commissions ($5-$6 for US equities or ETFs, $1/bond trades) – If you set up your SIMPLE to trade individual stocks, bonds, and ETFs, you’ll be charged fees whenever you trade in your account
- Mutual fund expense ratio (0.035%-1.5%) – This is a charge automatically deducted by SIMPLE IRA participant mutual fund accounts to cover the costs of trading and management
- Custodian Fee – Financial institutions that hold SIMPLE IRA assets typically charge $10 – $20 per year per employee to hold an IRA, which is deducted from individual employee accounts.
- Employer matching contributions – SIMPLE IRAs require employers to match employee salary deferrals between 1%-3%
SIMPLE IRA Contributions & Matching
Contributions to a SIMPLE IRA come from both the employee salary deferrals and employer contributions. In structuring a SIMPLE, employers choose from 2 different contribution plans.
SIMPLE IRA Contribution Limits 2018
Total contributions for SIMPLE IRAs are limited to $25,000 for 2018. Employees can contribute up to $12,500, with another $12,500 coming from employer matching. All employees aged 50 or over are also allowed to contribute an additional $3,000, bringing their total to $28,000.
SIMPLE IRA Matching
Using a SIMPLE IRA, employers are given two contribution options:
- Elective Contributions – Employers match employee contributions dollar-for-dollar up to 3% of their annual pay. Employers can temporarily reduce their match to as little as 1%, but match less than 3% for more than 2 of the preceding 5 years.
Non-elective Contributions – Employers contribute 2% of every employee’s annual pay to their account, regardless of whether they contribute.
SIMPLE IRA Rules and Deadlines
SIMPLE IRAs can be established anytime between January 1 and October 1 of the year they take effect. There is no annual filing requirement with IRS.
SIMPLE IRA Pros & Cons
Compared to IRA and 401(k) alternatives, SIMPLE IRAs have their own pros and cons for business owners to consider.
SIMPLE IRA Pros
SIMPLE IRAs have many advantages including:
- No administrative costs – SIMPLE IRAs are often called a poor man’s 401(k) because they offer many of the same benefits without the administrative costs
- Incredibly easy to implement – Like other IRA alternatives, SIMPLE IRAs are very easy to set up and can be self-administered
- No filing or testing requirements – Unlike 401(k)s, SIMPLE IRAs, do not require annual plan filings to compliance testing
SIMPLE IRA Cons
SIMPLE IRAs also have downsides including:
- Required matching – The main downsides to a SIMPLE IRA is that employers have very little flexibility when structuring a match. Employers must match employee deferrals dollar-for-dollar up to 3%. They can reduce the match to as little as 1%, but can’t match less than 3% for more than 2 years in a 5 year period
- Mediocre contribution limits – SIMPLE IRA contribution limits are higher than Traditional IRAs, but far lower than SEP IRAs or 401(k)s
- Universal eligibility – You have to offer the plan to all employees who earn over $5,000/year, regardless of their length of time at your business or their part-time vs. full-time status.
- Immediate vesting – Employer contributions to a SIMPLE IRA can’t be vested over time like in some 401(k)s
Where to Find a SIMPLE IRA
A big advantage for SIMPLE IRAs is that they can be easily administered by the business owner. To learn more about SIMPLEs, check out our article on what SIMPLE IRAs are and how they work. You can also read more about how to set up a SIMPLE IRA on your own or by linking your payroll service like Gusto to your accounts provider.
5. SEP IRA for the Self-Employed
If you’re self-employed and want to start a retirement account for yourself (and a spouse), SEP IRAs are the easiest and most versatile option. SEP IRAs let you contribute up to $55,000 or 25% of your annual compensation, whichever is less. There’s no minimum contribution requirement – it can change each year or even be zero.
Although SEP IRAs can technically be used at a small business with employees, they’re not a great option for companies with more than 5-8 employees because employers using SEP IRAs are required to fund contributions for all employees directly proportional to what you contribute for yourself based on annual pay. SEPs are ideal for small business owners with no full-time employees and an average annual income over $75,000.
Alternatives to SEP IRAs are typically SIMPLE IRAs and Solo 401(k)s. For more information on these options, you can check out the following articles:
SEP IRA Costs
Like other IRAs, the only costs for a SEP are account maintenance fees and regular trading/investment costs. Typical SEP IRA expenses include:
- Trading Commissions ($5-$6 for US equities or ETFs, $1/bond trades) – SEP IRAs established through brokerage firms to trade individual securities will incur fees whenever there are trades in the account
- Mutual fund expense ratio (0.035%-1.5%) – Mutual funds automatically charge this fee to cover trading and management costs
- Custodian Fee – Financial institutions that hold SEP IRA assets typically charge $10 – $20 per year per employee, which is deducted from individual employee accounts.
- Employee contributions – If you have employees, under a SEP you are required to fund contributions for them proportional to your own contributions based on annual compensation
SEP IRA Contributions & Matching
SEP IRAs are unlike any other type of retirement plan because there are no employee contributions. Employers fund all contributions for themselves and employees. Contributions must be in direct portion, based on annual compensation. If you contribute 10% of your pay your SEP IRA account, you must contribute 10% of each employee’s pay into their accounts.
SEP IRA Contribution Limits 2018
For 2018, employers can contribute up to $55,000 or 25% of their total annual compensation, whichever is lower. All contributions are classified as profit-sharing and whatever you contribute to your own account, you must also contribute for employees. This is why SEP IRAs are generally not attractive for small business owners with employees.
SEP IRA Matching
SEP IRAs are one of the more flexible plans for employer contributions. You can contribute whatever percentage of salary/profits you like, from 0% up to 25%. This percentage can change from year to year and be made after year-end. If you do have employees, however, remember that all eligible employees must receive the same percentage, proportional to their salary.
SEP IRA Rules and Deadlines
SEP IRAs can be formed anytime before an employer’s tax-filing deadline. All contributions are pre-tax for employers and employees, so they don’t impact employee tax liability. There’s no annual filing requirement with the IRS.
SEP IRA Pros & Cons
While they’re incredibly flexible, SEP IRAs have benefits and downsides for small businesses to take into account.
SEP IRA Pros
SEP IRAs have a number of distinct advantages including:
- Investment flexibility – Compared to 401(k)s it’s easier to set up a SEP IRA to trade individual stocks and bonds online
- Discretionary contributions – The key advantage to a SEP IRA is that you can contribute whatever amount you feel comfortable with from year to year. Unlike a SIMPLE IRA, you’re not locked into a given amount percentage, so long as you make proportional contributions for all your employees.
- High contribution limits – SEP IRA contribution limits are $55,000 for 2018, making it an attractive choice for higher-paid self-employed individuals
SEP IRA Cons
Some disadvantages of SEP IRA include:
- Funding employee contributions – If you have employees that are eligible for your SEP, whenever you contribute to your own account you are also required to make proportional contributions to each employee’s account based on annual compensation
- No borrowing – Unlike 401(k)s, you can’t borrow against IRA assets, including those in a SEP
For more information on how these plans work, check out our ultimate guide on SEP IRA rules and contribution limits.
Where to Find a SEP IRA
SEP IRAs can be arranged through an independent financial advisor or online with a mutual fund company like Vanguard.
“Most business owners who have employees do not setup SEP plans. Many individual business owners with no employees setup SEP plans. Some will fail to work with their CPA or accountant closely and either contribute too much to the plan, or they don’t take advantage of all the tax deductibility and contribution abilities.” -John Bowens, National Education Director, Equity Trust
6. Traditional IRA for Saving on Your Own
Traditional IRAs aren’t group retirement plans and are only available to people who are not eligible for an employer-sponsored plan and want to establish their own account. One big advantage that IRAs are portable – if you leave your job, you can still contribute to the same account. You can also contribute income from multiple businesses.
Traditional IRA contribution limits are $5,500 for 2018 – far lower than other options on our list. This makes them a good option for part-time employees who aren’t eligible for employer-sponsored retirement plans or small business owners who can’t afford to contribute more than $5,500 per year.
Traditional IRA Costs
Traditional IRAs are the least expensive retirement account to setup and manage. Their expenses are similar to other IRA alternatives, without the costs of matching or funding employee contributions. There aren’t employer costs for Traditional IRAs unless you use payroll software like Gusto to manage withholdings.
Typical Traditional IRA costs include:
- Trading Commissions ($5-$6 for US equities or ETFs, $1/bond trades) – SEP IRAs established through brokerage firms to trade individual securities will incur fees whenever you place trades
- Mutual fund expense ratio (0.035%-1.5%) – Mutual funds automatically deduct this fee to cover trading and management costs
- Custodian Fee – Brokerage firms or mutual fund companies that hold IRA assets typically charge $10 – $20 per year, which is deducted from individual employee accounts. Vanguard, for example, charges employees just $20/year for accounts under $10,000.
Traditional IRA Contributions & Matching
Contributions to Traditional IRAs are made by employees only. There are no employer-funded components.
Traditional IRA Contribution Limits 2018
The maximum contribution to a Traditional IRA for 2018 is $5,500. Account holders who are 50+ can contribute an additional $1,000 in catch-up contributions. Contributions cannot exceed your annual income.
Traditional IRA Matching
There is no Traditional IRA matching because IRAs are funded exclusively by employees.
Traditional IRA Rules and Deadlines
Traditional IRAs can only be used by individuals who are not eligible for an employer-sponsored retirement plan. For those who are eligible, an IRA can be set up at any time prior to their tax-filing deadline. Prior year contributions are allowed, and there are no filing requirements with the IRS.
Traditional IRA Pros & Cons
Traditional IRAs are very different than other options on this list and have their own advantages and drawbacks.
Traditional IRA Pros
Some advantages of a Traditional IRA include:
- Ease of use – A Traditional IRA is the easiest of all retirement programs to set up
- No administrative costs – Aside from account maintenance fees, there’s essentially no cost to administer a Traditional IRA
- Portability – IRA accounts can be easily moved if you want to change providers
Traditional IRA Cons
There are also some drawbacks with Traditional IRAs including:
- Low contribution limits – At $5,500, Traditional IRA contribution limits are very low compared to other retirement plan options
- No employer contributions – Employers have no way of incentivizing employee saving in a Traditional IRA because there is no matching or profit-sharing
- Employers still need to assist – Traditional IRAs have to be set up by employees. but you may still be expected to assist them by withholding pre-tax payments and sending them to the mutual fund.
- No borrowing – Like other IRAs, you can’t borrow against assets in a Traditional IRA
Where to Find a Traditional IRA
A Traditional IRA can be provided by any independent financial advisor or mutual fund company, like Vanguard. Most banks can also help set up Traditional IRAs.
Retirement Plan Comparison Chart 2018
|Annual Cost per Employee|
|Contribution Limits (2018)|
How to Provide Retirement Benefits
In order to provide retirement benefits to yourself and/or employees, you will need to take 6 steps including:
1. Gauge Interest from Employees Using a Survey
We recommend trying an employee engagement survey to ask employees directly about retirement benefits. If there’s no interest, you might want to consider having an employee meeting to get feedback, explain your goals, and answer their concerns.
2. Choose the Type of Retirement Plan
Look at our summary table of retirement plan options from above.
3. Choose a Provider
There are many small business-dedicated retirement professionals out there. You may want to consider Human Interest or Ubiquity 401(k)s for affordable plans. Vanguard is a very reputable company and cost-effective option for SIMPLE IRAs.
4. Decide on Matching
When you pick a provider, make sure to layout your budget needs to be for contributions, matching, and administrative fees. Review matching options, make a decision, and include your match in any plan documents.
5. Set Eligibility Rules
Some employers use retirement plans as a way to keep employees by setting up a vesting schedule. Others make employees wait for 6 months or a year before they become eligible. Whatever you decide, make sure these rules are included in plan documents and applied consistently.
6. Notify Employees
Once you’ve adopted a plan, provide notification and disclosures to all eligible employees. It can also be a good step to automatically enroll employees who qualify unless they opt out. This increases participation in the plan and gives you a better idea of budgeting for contributions and tax savings.
7. Make Contributions and Administer Your Plan
Once your plan is in place, the best thing you and your employees can do is to use it. For more details on setting up different types of plans, we have great articles on the following:
Benefits & Drawbacks of Offering Retirement Benefits
Offering retirement benefits is something every small business owner needs to think about carefully. Deciding what type of account is just as important as deciding whether to offer benefits at all. In addition to budget concerns or investment options, retirement accounts have a number of advantages and disadvantages worth considering.
Benefits of Offering a Retirement Plan
In addition to helping with your own saving, there are many benefits of implementing a retirement plan for your small business. Some of the benefits of offering a retirement plan include:
1. Tax Breaks
As a small business owner, you can recoup up to $500 in startup costs for setting up some new retirement plans for your employees. If you providing matching or profit-sharing contributions to your plan, those contributions are tax-deductible, resulting in further tax savings.
2. Employee Savings are Portable
Employees can take their retirement money with them if they leave your company. Your employees will coordinate this directly this with your provider.
3. Helpful to Employees and Potential New Hires
Retirement benefits are a great way to attract and keep employees. With employers competing for talent, offering a retirement plan helps you stand out and create a positive employer brand. This can potentially save you dollars on recruitment costs with lower employee turnover. Offering benefits like retirement plans can actually be good for your bottom line.
4. Simple to Setup & Maintain
Retirement plans are generally easy to set up and maintain, and won’t cost you lots of time or money. This is especially true now with newer providers entering the space. Some, like Ubiquity, have automated everything, including compliance testing.
5. Save for Your Own Retirement
As the business owner, you can also participate in any retirement plan that you offer. This means that while helping your employees, you can also get tax benefits and save for your own retirement.
Drawbacks of Offering a Retirement Plan
In addition to the advantages, there are also some drawbacks to offering a small business retirement plan. These drawbacks include:
1. Administrative Fees
Qualified retirement accounts, regardless of type, generally have fees that exceed those of regular savings or investment accounts. For 401(k)s, these fees can average $60-$100 annually per employee, while many IRAs cost $20-$25 per employee. There are also individual investment and trading costs, and some plans can include a one-time setup fee.
2. Employees May Not Participate
If you have employees who are younger or living on tight budgets, they may not understand or recognize the benefits of a retirement plan. If you utilize automatic enrollment, make sure that you do your best to communicate the benefits of tax-free savings.
3. The Expense of Employer Contributions
Many small business owners get nervous about the cost of matching employee contributions. Remember that some plans don’t require you to match employee contributions, while others offer flexible matching formulas.
4. Distribution Rules
Once money is deposited into a qualified retirement account, it can’t be withdrawn before age 59 ½ without incurring penalties. It can, however, be transferred to another provider in some cases. After age 70 ½, the IRS requires that you start taking required minimum distributions from any qualified retirement plans that still have balances.
The Bottom Line
Small business owners are not required to provide retirement benefits for themselves or their employees. However, implementing a business retirement plan is strongly encouraged. Doing so will not only help you to save for your own retirement but also help your employees and serve as a tool for recruiting the best talent to your company.
Remember that one of the most important components of a plan is choosing a reputable provider to help with implementation and administration. One of the best online providers for small business retirement plans is Human Interest. Human Interest’s technology allows the provider to pass savings onto their customers, saving you money with administration.