Best Retirement Plans for Small Business Owners

Small and medium business owners usually have too many thin on their radar and retirement planning tend to take a back seat. In the end most small and mid-size business owners don’t save enough for retirement.

According to Small Business Administration (SBA), only 36% of small business owners have an active IRA and only 30% participant actively contribute to it. Another twenty percent participate in 401(k) plans. This leaves almost 50% of small and mid-size business owners with no serious plan for retirement.

One of the reasons why most business owners don’t participate in retirement plans is lack of good information on retirement plans, how they work and what fits best for their situation. While finding the best plan is confusing and time confusing, it is important to remember that something is better than nothing.

We have compiled a list of popular retirement plan options for small and mid-size business owners to help them in their decision making process.

401(k) Plans

Most people are familiar with these. Virtually all large businesses in United States offer some kind of retirement plan option and 401(k) is the most common plan out there. However, 401(k) plans may not be the best option for small business owners because of administrative fees and lack of interest in smaller business accounts from large benefit plan brokers. 401(k) plans allow up to $16,500 in contribution (2011 cap) and these limits are adjusted for cost-of-living from time to time. There is also a catch up contribution option for employees age 50 or over.

Profit Sharing Plans

As the name suggests these plans are funded by employer alone and those contributions are completely discretionary. Annual filing of form 5500 is required with IRS as well. Profit sharing plans can co-exist with other type of retirement plans. Total contribution is capped at $49,000 (2011) or lesser of 25% of the annual compensation.

SIMPLE IRAs

These are fairly easy to set up, administer and maintain. They are also offered by a large group of financial institutions including online brokerage firms so easy to shop around for administrative fees. These are usually a good match for employer with less than 50 employees.

SEP-IRAs

These are easy to setup and maintain. Administrative costs are fairly low with these plans. Contribution is capped at either $49,000 (2011) or 25% of the annual compensation (up to $245,000). These plans are good fit for very small businesses as well as sole proprietorship.