Small business owners tend to focus on their day-to-day activities. They are consumed by ensuring products and/or services are delivered to customers, and by identifying ways to grow. These business owners are typically very motivated, but many are not focused on themselves and their own financial futures – especially retirement plans. This is where the knowledge and skills of a financial advisor can be invaluable. (For more information, see: Do Small Business Owners Need Financial Advisors? )
In your role as an advisor, you can help business owners take a step back and look at the big picture. And you can help them realize that they need to plan to make all their hard work pay off for them and their family members. The good news is, there are many retirement options you can offer your small business clients. (For more information, see: Plans the Small Business Owner Can Create .)
SEP-IRA
Simplified employee pension applies to small business owners and self-employed workers (including workers who employ others). It can be used by sole proprietors, partnerships, and corporations, and it is easy to establish and maintain. This plan also offers a high degree of flexibility, as it can be set up and funded for the previous tax year up to the date the company's tax return is filed (including filing extensions). (For related reading, see: Benefits of a Simple IRA .)
All contributions to a SEP-IRA are made by the employer and are deductible as a business expense. Employers can match up to 25% of workers' compensation up to a maximum of 53.000 USD for 2015 contribute. Withdrawals from the plan are available at any time and are generally subject to income taxes; a 10% early withdrawal penalty may apply if the plan participant is younger than 59½. The SEP-IRA can be rolled over into a traditional retirement account. (For more, see: Traditional IRAs: Introduction .)
One clear disadvantage to the SEP-IRA for business owners with employees is that the business must contribute the same percentage of compensation for all employees. This can be very expensive. (See more at: SEP-IRAs: Contributions .)
Solo 401 (k)
A solo 401 (k) plan, also known as an independent 401 (k) plan, is meant for self-employed individuals and business owners with no employees other than business partners or spouses. It can be used by sole proprietors, partnerships and corporations. There is little or no administration required, although once plan assets hit $250, 000, the business owner must file Form 5500 with the Internal Revenue Service (this is not difficult).(See more at: Independent 401 (k) s: Are they qualified plans? )
Both employee and employer contributions can be made. The employee may receive a salary for 2015 in the amount of $ 18.000 ($ 24.000 if age 50 or older at any time during the year) defer, and the maximum total contribution per employee is $ 53.000 ($ 59.000 for those 50 and older). In addition, the employer may make profit-sharing contributions that are deductible business expenses; employee deferrals flow through the individual's tax returns. If the plan document allows, loans may be taken from a Solo 401 (k). (See more at: Benefits of Independent 401 (k) s .)
The Solo 401 (k) must be in place by the end of the calendar year to be used in the current version. This means that the plan has until 31. December 2015 must be prepared to receive deductible contributions for 2015. Employee contributions must be made by the end of the calendar year, but employer contributions can be deferred until the date of the previous year. Tax return is filed (including extensions). (See more at: Independent 401 (k): A Top Retirement Plan for Sole Proprietors .)
Similarities
Both the SEP-IRA and the Solo 401 (k) plan are easy to open and available from most major companies, including Vanguard Group, Fidelity Investments, Charles Schwab Corp. (SCHWCharles Schwab Corp. 44. 69-0. 29% Created with Highstock 4. 2. 6 ), T. Rowe Price Group Inc. (TROW TROWT Rowe Price Group Inc95. 03 + 0. 49% Created with Highstock 4. 2. 6 ) and others.
Both plans offer a great deal of flexibility in terms of the types of investment vehicles that can be used, including mutual funds, exchange-traded funds, closed-end funds, individual stocks and bonds. Each also has some prohibited investments and transactions, and you should speak with the administrator to make sure you understand the rules. (For more information, see: 3 Retirement Account Rules You Need to Know .)
Differences
The funding formula is the biggest difference in the two plans.
SEP-IRA contribution levels are based on a percentage of employee income up to 25% (functionally 20% for a sole proprietor filing a Schedule C). This means that an employee earning $100, 000 can contribute $25, 000 to the SEP-IRA for the year; if that employee's income in the following year increases to 30.000 would decrease, the allowable contribution would also decrease – to a maximum of $7.$500 for the year.
Solo 401 (k) contribution levels, on the other hand, are not tied to income. An employee can contribute up to $18.000 (or $24.000 at 50 or older) contribute, regardless of how much he earns. This means that the employee whose income is reduced to 30.000 $ dropped, could forgo more than twice as much on a solo 401 (k) as possible on a SEP-IRA.
In most situations, the Solo 401 (k) will allow for higher employee contributions – even without the profit-sharing component. (For more, see: Entrepreneurs: rules for qualified retirement plans .)
Two great options
Both plans can be an excellent tool for self-employed financial advisor clients.(For more information, see: Are you a small business? )
For example, let's say you have a client who doesn't yet have a retirement plan for himself and knows he will have more in taxes for the prior year than he anticipated. Even though the calendar year has ended, the client can set up and fund a SEP-IRA until the day their tax return is filed. The creation of the plan provides for an additional tax deduction and forces the customer to take this first step towards financing a company pension plan.
If you have self-employed clients in addition to a regular job, you can put away a little extra for retirement with both plans and offer a tax deduction against that self-employment income. Which plan makes the most sense depends on the customer and depends on factors such as z. B. How much he saves in his employer-sponsored retirement plan.
For high-income self-employed clients, such as doctors and lawyers, the Solo 401 (k) can be combined with a retirement plan to allow the client to save a lot of money for retirement and realize significant tax savings. (For more information, see: How advisors can use the doctor's niche .)
The end result
Small business owners and self-employed are responsible for financing their own retirement. The SEP-IRA and Solo 401 (k) are two great tools to help these people achieve this goal. As their financial advisor, you can add value by helping these clients implement the right plan for their situation. (For more information, see: 10 tax benefits for self-employed .)