While the benefits of retirement plans for small-business owners may seem obvious, many owners procrastinate in setting one up, and thus miss out on the long- and the short-term benefits -- many of which revolve around tax.

"They think time is on their side," said Holly Manton, a wealth management consultant at HD Vest Financial Services. "They don't think they need to start early, and they lose the advantage of time. The result is that they miss out on the potential market growth in the retirement account over time and the deductions of the employer contributions to retirement plans, so they will be paying more in taxes. The earlier you start, the faster you can get to your retirement goal."

Along with the obvious advantage of these plans -- building up money for retirement -- they can also help with avoiding the Alternative Minimum Tax and the 3.8 percent Net Investment Tax, and even with reducing the expected family contribution for college, since the money put into a qualified plan reduces the yearly taxable income that clients have to report for financial aid.

The most common sole proprietor retirement plan options are the SEP IRA, the SIMPLE IRA, and the Solo-401(k), said Manton. There are a number of factors to consider when deciding on which plan to choose, she noted.

SEPs and SIMPLEs are IRA-based. Under a SEP, contributions are made by the employer, not the employee, and are invested in employee-owned IRAs. A SEP IRA allows the business to contribute and deduct up to 25 percent of compensation, but no more than $52,000 per employee for 2014.

Under a SIMPLE IRA, employees may choose to make salary reduction contributions and the employer makes matching or non-elective contributions. Generally, the employer must make dollar-for-dollar matching contributions on the first 3 percent of the amount the employee contributed, or a 2 percent non-elective contribution of each eligible employee's compensation.

The Solo-401(k) is designed for businesses without any eligible common law employees and is ideal for the partnership or sole proprietor employing only family members.

Among other considerations:

  • You can have a SEP with another plan, but having a SIMPLE precludes participation in another plan during that plan year.
  • A SEP IRA is the only plan that can be established after year-end.
  • Family members don't count toward the solo portion, so it's possible to have the entire family on a Solo-401(k).
  • A SIMPLE IRA has a matching component so you can't decide that you're going to make a zero match one year.

For more on how clients can use retirement plans to reduce taxable income and defer tax on investment growth, see our video whiteboard in the Tax Alpha section on AccountingToday.com.


For more information about HD Vest Financial Services, please visit hdvest.com/taxalpha3 or contact a Business Development Consultant at (800) 742-7950.

Money withdrawn from a SEP-IRA (and not rolled over to another plan) is subject to income tax for the year in which an employee receives a distribution. If an employee withdraws money from a SEP-IRA before age 59½, a 10 percent additional tax generally applies.

Employees who withdraw funds in a SIMPLE plan before age 59½ may have to pay a 10 percent tax on any withdrawals, in addition to any regular income tax. However, if the withdrawal occurs during the employee's first 2 years of participation, the additional tax is increased to 25 percent.

If withdraw funds in a 401(k) plan before age 59½ may have to pay a 10 percent tax on any withdrawals, in addition to any regular income tax.

Retirement plans typically involve fees, expenses, and services that should be compared when considering a new retirement plan

Investments are subject to market risks including the potential loss of principal invested.

HD Vest Financial Services® and its affiliates (collectively, “H.D. Vest, Inc.”) do not provide tax or accounting services. You should consult your tax professional regarding the tax implications of any investments.

HD Vest Financial Services® is the holding company for the group of companies providing financial services under the HD Vest name.  
Securities offered through HD Vest Investment ServicesSM, Member SIPC, Advisory services offered through  
HD Vest Advisory ServicesSM, 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000.


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