Retirement planning for you and your staff
You can have both an employee and a SEP IRA - but only temporarily.
(FORTUNE Small Business) -- Dear FSB: I have my own business with one part-time employee who works 25 hours each week. I have an SEP IRA and I normally contribute the maximum - 20% of my earnings. Now with an employee, what are the simplest and least expensive plans available in my situation? Thanks.
- Maggie Wu, Tustin, Calif.
Dear Maggie: Since you just hired your employee, you can stay in your SEP (Simplified Employee Pension) IRA and contribute the same amount for quite some time.
"You only need change your plan if your employee has been working for you three out of the last five years," says Jeffrey F. Guiltinan, founder of All American Advisors in Santa Maria, Calif. "The employee doesn't have an SEP because he's not self-employed, by definition. But if you decide to incorporate your business with the employee, you can still contribute for three years without repercussions."
Bob Foland of The IRA Specialists in Englewood, Colo. adds that there are other options to choose from, such as Safe Harbor 401(k)s.
"A Safe Harbor 401(k) will allow you to contribute a relatively small amount of money for an employee, maybe 4% of the employee's earnings, and will enable the employer to contribute up to $15,500 for herself," he says. "That maximum is $20,500 if the employer is older that 50."
Guiltinan adds that with a Safe Harbor 401(k), you are required to match 4% of your employee's contribution.
Another option to consider is the SIMPLE (Savings Incentive Match Plan for Employees) IRA, which is similar to the Safe Harbor 401(k) option but costs less.
"The potential problem is that the SIMPLE won't allow for the $15,500 or potentially $20,500 that the 401(k) will allow. That limit would be $10,500 for someone younger than 50, $13,000 for someone older," says Foland. "The SIMPLE plan would also require a small contribution for each employee of the company, including the owner. This contribution can be as low as 2% or as much as 4% depending on certain choices made by the employer."