Entrepreneurs

Setting Up an Office IRA Can Protect You and Your Small Business Team. Here Are 3 Great Options.

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When you first start a business, it may feel like the to-do list is endless. All of the paperwork, all of the hurdles, making your first hires, managing the office, constantly monitoring data — it can be overwhelming. In the whirlwind of those early obstacles, you may neglect something vital to your success, which is setting up an office retirement plan. This is not something to be put off for later or lost in a pile of other work. It’s something you should do now that will promise financial stability and trust among employees in the future. 

As you grow, you’ve got options

As a business owner, there are multiple types of IRAs you can offer to your team. However, when you are just starting and still relatively small, your best option is usually a Savings Incentive Match Plan for Employees account (SIMPLE). A SIMPLE IRA applies to companies with less than 100 employees. It is beneficial because it doesn’t have many of the start-up and operating costs you might see with other more conventional plans. It also doesn’t require you to have other retirement plans, is easy to put in motion in terms of paperwork, and has no filing requirement.

SIMPLE IRAs give employees a choice about whether to contribute to the account. But they require you as the employer to contribute either a matching contribution of up to 3 percent of whatever the pay is or a 2 percent nonelective contribution for every eligible employee. You can take money out of the SIMPLE IRA any time, and the withdrawal is tax-deferred, so you’re taxed in the year you take it. If you take the withdrawal before age 59 ½, there’s a 10 percent fee. If you take it within the first two years, that fee bumps up to 25 percent. 

Related: How to Have a Retirement Worth Saving For

For 2022, to do a SIMPLE IRA, you need to have made at least $5,000 in any prior two years and be expected to earn $5,000 in the current year. You can put up to $14,000 a year into a SIMPLE IRA. If you’re over age 50, you can put in another “catch up” contribution of up to $3,000, so your total deposit can be up to $17,000.

You can also opt for a ROTH IRA in place of or in addition to a SIMPLE IRA. ROTH IRAs are subject to most of the rules for traditional IRAs. The big difference between traditional, ROTH, and SIMPLE IRAs is that, with a ROTH IRA, contributions are taxed when you first invest the money. When you want to withdraw funds, there’s no new tax event. You’ve already paid your taxes and don’t have to do so again. Although, you must leave the money in your account for at least five years and withdraw after age 59 ½  to avoid a tax penalty. 

For 2022, you can contribute to a ROTH IRA only if you make less than $144,000 as an individual or $214,000 as a married couple. The contribution limit is $6,000 a year for those under age 50 and $7,000 for those over 50.

Related: 6 Reasons to Pursue Entrepreneurship in Retirement

Finally, it can make sense to use a 401(k). You can do a 401(k) even with just one employee, but they have to be at least 21 and have worked at least 1,000 hours in the previous year. You don’t have to contribute to employee accounts if you don’t have one for yourself. But if you contribute for yourself, you are required to make proportional contributions for each eligible employee. 401(k) plans can be more flexible and have higher contribution limits, and there’s an option to do a ROTH 401(k). But 401(k) plans are more complex and cost more to set up and maintain. It’s usually better to look into these once your business has grown a bit.

In 2022, employees can put up to $20,500 a year in a 401(k) if they’re less than 50 years old. If they are 50 years old or older, they can contribute up to $27,000 a year. Together, you and your employee can contribute up to $61,000 ($67,000 for those 50+ years old) or 100 percent of compensation, whichever is less.

No need to play games

As an employer, you may be able to do more than one IRA at a time. You also can pivot from one IRA to another, such as starting with a ROTH IRA and then shifting to a traditional IRA, based on how your business is doing. But the general rule of thumb is to put your IRA into your budget right from the start. Any brokerage house can set it up for you. It’s not necessary to play the stock market here. Just buy a mutual fund that invests in many different companies and keep putting about $1,000 a month into the same IRA every month. Then be sure you reinvest any dividends automatically into the IRA.

Related: 7 Best Strategies for Saving for Retirement in 2022

Choose the IRA right for you and your business now

Most people are not in any position to disregard how they’ll fare financially in retirement. If you wait too long, you pay the price. Setting up an IRA can protect you and your team and indirectly contribute to your business’s worker loyalty and stability. If you haven’t set up your accounts yet, do so now. It’s a smart money strategy that doesn’t have to cost you a dime.

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