Setting up a retirement plan is one of the best ways to ensure that your business is helping you and your employees build a financially secure future.

Unfortunately, the smaller a business is, the less likely it is to offer a retirement plan. According to recent surveys, only about one in four small businesses offer retirement plans all-business owners often cite factors like administrative responsibilities, the cost of maintaining a retirement plan, and lack of employee interest as reasons they haven’t set up a plan.

But whether you’re a self-employed worker or have a sizeable team, setting up a retirement plan could be a valuable investment for your business. Sponsoring a defined-contribution plan offers some great benefits, including the ability to make regular company contributions to your own retirement savings while providing tax-deferred growth for your (and your employees’) retirement nest egg.

Adding a retirement plan to your benefits package can also help you attract top talent and support job satisfaction among staff, which can mitigate the costs and lost productivity that may come with high employee turnover.

For your business, retirement plan contributions and related expenses are tax-deductible, and a tax credit for eligible small businesses will help with the startup costs.

Which Plan Is Right for Your Business?

Before choosing and setting up a plan, you’ll need to consider these factors:

• The size of your business and team – do you have a large staff, or is it just you and your spouse and/or business partner?
• Do you want employees to contribute through payroll deductions?
• How much will your company’s matching contributions be (if applicable)?
• Can you handle additional administrative responsibilities and expenses?
• What are your own savings goals as a business owner?

You’ll also want to consider how much participation you can expect. For example, employees under age 30 or with lower wages may be less likely to set aside some of their paycheck in a retirement plan than employees who are closer to retirement.

Many businesses choose one of these three types of retirement plans.

1. SIMPLE IRA

This IRA-based plan is designed for companies with no more than 100 employees, and it is less cost- and labor-intensive than other plans. The financial institution you partner with to manage the plan will do most of the paperwork, and employees can pick their own investments.

Plan participants can contribute up to an annual limit that’s set by the IRS for every tax year.

Employers are required to contribute by matching employees’ contributions (up to 3%) OR by making a fixed contribution of 2% of each eligible employee’s gross pay. All contributions are immediately fully vested.

2. 401(k)

A traditional 401(k) plan is not limited to businesses with 100 employees or fewer; however, a 401(k) plan comes with more paperwork and costs and can limit employees to a preselected list of investment choices.

Like the SIMPLE IRA, employees can decide how much to contribute up to the IRS’s annual limit. No employer contribution is required, although many employers do make additional contributions, such as matching or 50% contributions. All contributions are immediately fully vested.

If you’re a sole proprietor and have no employees (other than your spouse), an individual 401(k) is also an option. This may provide more flexibility than a SEP IRA (see below), including the ability to make catch-up contributions after age 50.

3. SEP IRA

A Simplified Employee Pension (SEP) IRA is available to business of any size, and if you’re self-employed or have only a few employees, a SEP IRA could be a smart option.

Like a SIMPLE IRA, employees can make their own investment decisions. Unlike a SIMPLE IRA, a SEP is funded solely by employer contributions (though employees may also make individual contributions to a traditional or Roth IRA), and the annual funding requirements are flexible. All contributions are immediately fully vested. Note that each employee must receive a contribution that is the same percentage of their salary, up to 25% of their total compensation, with a maximum per-employee contribution that’s set for each tax year.

Making the Most of Your Retirement Plan

A great retirement plan is an excellent incentive for recruiting and one of the most valuable benefits you can offer your employees, so you’ll want to communicate its benefits to staff and encourage them to take part. You will also want to educate them about why they should contribute at least enough to take full advantage of your employer match, if you are offering one, and remind them about the 10% IRS penalty for taking early withdrawals from their retirement plan (i.e., before age 59½, with certain exceptions).

Support Every Step of the Way

To help you navigate the complexities of company retirement plans and choose the best option, it’s important to work with an experienced partner. Reach out to our Wealth Management Team for custom solutions for your business.