What is the best retirement plan if I own a small business with my wife and one other person as the employees?

by Tami Noll Russo, CPA | Jul 09, 2018

I have a small business (insurance agency). Besides myself and my wife, I have one full-time employee. Annual sales amount to around $275,000. What is the best retirement savings option for me: SEP, 401(k), or SIMPLE IRA? I want to contribute as much as possible in my and my wife's retirement, but keep the employee contribution to a minimum. I, my wife, and my employee all receive W-2s. My approximate salary is $60,000, my wife’s is $30,000, and my one employee makes about $30,000 as well.

The following are a few considerations based on your inquiry.

401(k) - You say you want to contribute "as much as possible." The defined contribution 2018 plan limit is $55,000 for those under 50 and $61,000 for individuals who will turn 50 in 2018. The only way to get to numbers that high with the W-2 compensation you referenced is with a 401(k). However, a 401(k) is going to be the most expensive retirement plan to maintain. If you weren't thinking of trying to exceed the individual contribution limits of $18,500 ($24,500 for 50 or greater), then let's look at the other options.

SEP - You say you would prefer getting more money put into yours and your wife's account and less to the employee. However, with the SEP, there are no employee contributions. If you put 25 percent into your account, everyone gets 25 percent of compensation.  

SIMPLE IRA - The individual contribution limits have been reduced to $12,500 if under 50 and $15,500 if age 50 or older. The employer generally agrees to match 100 percent of 3 percent. The employer could also choose a nonelective contribution of 2 percent. There are very low fees here, if any.

As is often the case, the answer is “It depends.” If you choose to have this conversation with a knowledgeable CPA/financial adviser, the conversation would go quickly based upon clarification of some basic questions. 

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Tami Noll Russo, CPA, is a certified financial planner with Noll Financial Services in Middletown, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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