A large part of tax planning for small businesses is assisting them in choosing the right retirement plan. There are a number of options – each with pros and cons. When choosing a plan, there are a number of options you need to consider.

Since this is a rather large topic, we decided to cover it in a series of videos on Tax Talk. In the first video, we discuss the different factors you may want to consider when making your decision.

What types of retirement accounts are available for small businesses?

Generally, we’re looking at a few types of plans:

• SEP-IRA
• SIMPLE-IRA
• 401(k)
• IRA (traditional or roth)
• Defined Benefit Plans

We are going to be releasing separate videos and articles on each of these and will link back to those as they become available.

For now, let’s look at some of the factors that you’d need to consider when choosing a retirement plan.

What is the structure of your business?

The first important piece of information is the structure of your business. I may be more inclined to consider certain retirement plans over others if you are a sole proprietor. Conversely, if you are a C Corp, I may be more inclined to consider other types of accounts.

How many employees do you have?

As your company grows, certain types of accounts tend to scale better than others. While a SEP-IRA may be a fantastic choice for a sole proprietor, it is generally not a great choice for a company with 10 employees. This company may benefit from a SIMPLE-IRA or 401(k) instead.

Do you want to cover your employees?

While many employers would like to provide a retirement account for their employees, many are not able to fund the employee accounts. This will have a big impact on your choice. If you do not want to cover your employees, you will not want a SEP-IRA or a defined benefit plan. Instead, you may opt to stick with a traditional IRA.

You may also want to provide a retirement plan for your employees without breaking the bank. In that case you may choose a SIMPLE-IRA or a 401(k). Each provide matching options which are surprisingly affordable for most small businesses.

How much would you like to contribute?

Each of these retirement plans offer different contribution limits. If you plan to contribute less than $6,000 per year, you may be able to stick with a traditional IRA. If you would like to contribute up to $57,000 per year, you may need a SEP-IRA. Other accounts such as the SIMPLE-IRA have higher limits than the traditional IRA, but lower limits than the SEP or 401(k). As a result, the amount you would like to contribute is a major factor in choosing an account.

How much flexibility do you need in contributions?

Some employers have large swings in their business income. Those employers prefer plans that allow large contributions in good years and little or no contributions in bad years. Other employers have very steady income and seek to have steady contributions over time.

Each of these options provides varying levels of flexibility. For example, with a SEP-IRA you can contribute $0 in one year and $57,000 in the next. On the other hand, a defined benefit plan requires very consistent contributions over time.

You must consider the required level of flexibility when selecting a retirement plan.

What are your goals?

Not all employers have the same goals. Some would like to offer a retirement plan to attract talent. Others are using it to reduce their tax burden. Your specific goals must be considered when choosing your plan.

So what’s the best plan for you?

There is no right answer. There may however be a right answer for you. In order to determine the best retirement account for your individual situation, we would need to discuss each of these factors above and make an individualized recommendation for you.

Call me and I would be happy to discuss this with you.