- Joined
- Sep 10, 2006
- Messages
- 4,071
Hello all! We have a good friend who has his own business (health care practice) and is interested in getting his retirement plan going. He would like to learn about his options to make an educated decision instead of just giving the reigns completely to his accountant. I offered to post here to pick your minds for information. I have no background with small business retirement planning (I have plenty with our own personal retirement planning), so he and I will be facing a steep learning curve on this topic...so please be patient and kind with your responses, especially if I ask a very obvious question!
He bought this practice I believe 3 or 4 years ago. His practice is thriving and growing. He is in his late 30's and does not have any personal retirement funds yet. He is married with 3 children.
He has 7 employees.
I've been reading about small business retirement plans, but honestly, my head is kind of swimming with trying to figure out what type of plan would be most advantageous for him to set up. We looked over what is offered at Vanguard, and we also looked at this tool (IRS Retirement Plans Navigator), but the decision of what type of plan to choose is still clear as mud to me. I looked at this table (IRS Retirement Plans Navigator) and here are my questions so far:
1) Payroll deduction IRA
- only allows $5000 in contributions. This doesn't seem like nearly enough $ to fund anyone's retirement over the years.
2) SEP
- this allows you to put away a huge chunk of change (up to $50K or 25% of the participant's income, whichever is less). It seems like it would be a great option, especially since it is not required every year, so it offers flexibility if the business is not doing as well one year. However, I read that if the self-employed person does have employees, all employees must receive the same benefits under a SEP plan. So, if he puts away 25% into an IRA for himself, he then has to do this for all of his employees, right? Isn't that awfully expensive and counterproductive? Yes, this I'm sure is stupid question #1, and you all will make the answer clear to me!
3) simple IRA
- requires the employer to make contributions every year (albeit a much smaller percentage than the SEP), but it does lock you in to doing this, so not sure about starting out with this...? Also, can only put away $11,500 which again doesn't seem like a way to really sock away some coin and reduce taxable income significantly. Comments?
OK, so I stopped looking further at the options listed on that IRS site, since Vanguard didn't go into them and this was already enough information to take in. Should we consider one of the other options as well? (I didn't look at the Individual 401K option listed on Vanguard b/c he has employees.)
He bought this practice I believe 3 or 4 years ago. His practice is thriving and growing. He is in his late 30's and does not have any personal retirement funds yet. He is married with 3 children.
He has 7 employees.
I've been reading about small business retirement plans, but honestly, my head is kind of swimming with trying to figure out what type of plan would be most advantageous for him to set up. We looked over what is offered at Vanguard, and we also looked at this tool (IRS Retirement Plans Navigator), but the decision of what type of plan to choose is still clear as mud to me. I looked at this table (IRS Retirement Plans Navigator) and here are my questions so far:
1) Payroll deduction IRA
- only allows $5000 in contributions. This doesn't seem like nearly enough $ to fund anyone's retirement over the years.
2) SEP
- this allows you to put away a huge chunk of change (up to $50K or 25% of the participant's income, whichever is less). It seems like it would be a great option, especially since it is not required every year, so it offers flexibility if the business is not doing as well one year. However, I read that if the self-employed person does have employees, all employees must receive the same benefits under a SEP plan. So, if he puts away 25% into an IRA for himself, he then has to do this for all of his employees, right? Isn't that awfully expensive and counterproductive? Yes, this I'm sure is stupid question #1, and you all will make the answer clear to me!
3) simple IRA
- requires the employer to make contributions every year (albeit a much smaller percentage than the SEP), but it does lock you in to doing this, so not sure about starting out with this...? Also, can only put away $11,500 which again doesn't seem like a way to really sock away some coin and reduce taxable income significantly. Comments?
OK, so I stopped looking further at the options listed on that IRS site, since Vanguard didn't go into them and this was already enough information to take in. Should we consider one of the other options as well? (I didn't look at the Individual 401K option listed on Vanguard b/c he has employees.)