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Five Reasons Why Small Businesses Should Establish Retirement Plans

By Dmitriy Fomichenko, President and Founder of Sense Financial


"You can be young without money, but you can't be old without it." ~ Tennessee Williams

Being an average American adult, employed or self-employed, you may have heard about the American retirement crisis. If you didn't for some reasons, according to the National Institute On Retirement Security's report, "The Continuing Retirement Savings Crisis," the average American household- including both with retirement account or without one- has a median retirement account balance of $2,500 for the entire working-age families, whereas the figure stands at $14,500 for households closing on retirement.

Worried? If not, here are two more facts to consider:

  • A family requires 85% of its pre-retirement income to maintain its current living standard after retirement.
  • Current social security replaces roughly 35% of the pre-retirement income of an average household.

Now, these are some facts that you must worry about, and they should be able to justify the title of the report very well.

If you fall under the category of small business owners or self-employed professionals, the scenario doesn't change much, except for the fact that you might have your business to support your retired life. However, the catastrophic financial crisis our economy faced in 2008 shook the very roots of financial safety and security, depleting more than $14 trillion of the U.S. household money in 2009, as mentioned in Roosevelt Institute's publication, "the Crisis of Wealth Destruction." Considering these facts, it is safe to say that preparing for retirement upfront is the only option guaranteeing a comfortable retired life.

How Does a Retirement Plan Help Small Business Owners?

Attracting Talent and Employee Retention

Small businesses depend entirely on the quality of people they have, and hiring top talent is a challenging proposition for them, let alone retaining them. A retirement plan can help you attract top talent, and it has been revealed in multiple studies that employees tend to stick longer with companies having competitive retirement plans.

Receive Government Aid in Tax Credits

Even the government is ready to support small businesses opting for retirement plans, with tax credits. For companies having fewer than 100 employees, you get up to 50% of startup costs in tax credits, up to a maximum limit of $500. Further, you have the liberty to claim tax credits for three years starting with the year before which the tax plan comes into effect. These tax credits will help in cutting the startup and administration cost of the retirement plan.

Save Up to $59,000 in Tax Bills in 2015 and 2016

If you are a small business owner, sole proprietor, or self employed professional, with no employees except your spouse, a Solo 401k plan can help you contribute up to $53,000 in cumulative employee and employer contribution, along with an additional $6,000 catch-up contribution for individuals above 50 years of age. If you are working with your spouse, both of you can make net contributions of up to $118,000 in 2015 and 2016.

Company Match Contributions Help in Tax Savings

If you are offering company match contributions to your employees' retirement plan, the entire contributions, within the allowed limit, will be tax deductible, helping you lower the overall tax bill, while ensuring the financial safety of your employees. At the same time, employees will contribute towards their retirement, building their net worth in the process.

Tax-Deferred Growth of Resources

One of the most important benefits of establishing a retirement plan is the tax-free growth of your contributions. All the contributions that you make into a retirement fund grow tax-free until withdrawal, and it can help you lower tax bills by paying income tax at the time of withdrawal, instead of capital gain taxes.

Three Retirement Plans for Small Business Owners


For small business owners with employees, Simplified Employee Pension (SEP) IRA is one of the available retirement solutions, under which an employer can contribute up to 25% of the employee's compensation to a maximum limit of $53,000 for 2015 and 2016. SEP IRA offers a higher contribution limit, however, you need to make equal contributions to all the plan participants, which could be an expensive proposition if you have more employees. This retirement plan does not offer catch-up contributions for individuals above 50 years of age.


Savings Incentive Match Plans for Employees (SIMPLE) IRA is another retirement plan available for small business owners. It is a more flexible retirement solution, offering 2% non-elective contributions or matching contributions of up to 3% of the compensation of the employee. When compared with other plans, it has lower contribution as well as filing requirements.

Solo 401k

Solo 401k is a retirement solution for small business owners and self-employed professionals with no employees, except their spouse. Solo 401k retirement plans are excellent in terms of their contribution limits, which stands at $53,000 for 2015 and 2016. In addition to the annual contributions, it allows catch-up contributions of up to $6,000 for professionals above 50 years of age, pushing their overall contribution limit to $59,000. Further, the self directed Solo 401k comes with extended investment options, including real estate, tax liens, tax deeds, precious metals, and private business lending, along with other traditional investment options.

Dmitriy Fomichenko is President and Founder of Sense Financial, a leading provider of retirement accounts with "Checkbook Control": the Solo 401k and the Checkbook IRA. To learn more about the Solo 401k plan, please visit sensefinancial.com or email us at info@sensefinancial.com.


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