Oregon is now one of 28 states that requires all businesses to offer retirement plans to their employees. While the state-sponsored OregonSaves retirement savings plan is available to businesses in the private sector, there are several other options available that you may want to consider.
Outside of fulfilling the state requirement, offering an employer-sponsored retirement plan can offer many benefits from helping to attract the best talent to maximizing your own tax deductions. Therefore, determining which retirement savings plan is right for your business is paramount when planning both for your own retirement and your employees.
If you or someone you know is a business owner, we hope this blog will help you better understand your options and identify the best retirement plan for you, your business, and your employees.
401(k) Plan
Arguably the most popular workplace retirement plan, the 401(k) or defined contribution plan allows workers to contribute a portion of their compensation to their retirement accounts on a tax-deferred basis (traditional 401(k) accounts) or an after-tax basis (Roth 401(k) accounts).
- Contribution limits for this type of plan are significantly higher than IRA plans. In 2021, 401(k) contribution limits are $19,500 (up to $26,000 for workers age 50 or older [ii]).
- Employers may also make matching contributions to employees’ accounts, helping incentivize employees to save.[iii]
SOLO 401(k)
If a small business has no eligible employees other than a spouse, the employer can contribution to a Solo 401(k).
With a Solo 401(k), the employer can make contributions both as an employer and an employee, allowing them to maximize both their retirement contributions and business deductions. They can contribute up to $19,500 in 2021 or $26,000 if you are over the age of 50.
SEP IRA
A simplified employee pension (SEP) can be a great option for smaller businesses and allows for larger contributions and greater flexibility. Here’s why:
- For 2021, employers can contribute pre-tax contributions of up to 25% of income or $58,000, whichever is less.
- Almost any small business can establish a SEP.
- The employer can modify the amount they contribute on behalf of their employees each year.
Profit-Sharing Plan
Another type of defined contribution plan is a profit-sharing plan, which is funded entirely by discretionary employer contributions. In 2021, employers may contribute up to 25% of the employee’s compensation or $58,000 - whichever is less. They may also be eligible to take tax deductions for a portion of their contributions.[iv]
SIMPLE IRA
Employers with less than 100 employees may want to consider a SIMPLE IRA plan. These require little to no administration and both the employee and employer can contribute.[i]
In 2021, employers can match employee contributions to a SIMPLE IRA up to 3% of the employee’s compensation or contribute a standard 2% of each eligible employee’s compensation up to $290,000. Keep in mind, employer contributions are tax-deductible.
Defined Benefit Plans
These are most commonly referred to as “pension” plans. They are funded entirely by the employer and are designed to provide employees with a steady income in retirement.
Generally, each employee’s individual benefit amount is calculated based on their length of service to the company and their earnings history.
Firenze Wealth Can Help You Evaluate Your Options
Choosing the right retirement plan is an important component of your business - for both you and your employees. Talk to your Firenze Wealth advisor to evaluate your options and help you make an informed decision. Don’t have a Firenze Wealth advisor? Contact us today: https://www.firenzewealth.com/contact.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Sources
[iii] https://www.investor.gov/additional-resources/retirement-toolkit/employer-sponsored-plans
[iv] https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-profit-sharing-plan