Q. I’m leaving my corporate job and joining a friend’s small business as an employee. She doesn’t have a retirement plan. I want to contribute more than what I can do with an IRA. How can I convince her to start a company plan, and what are the options? I would be her only employee.
— A new adventure
A. You are wise to consider your future retirement through an employer-sponsored plan.
There are advantages for both of you.
For starters, you could save a larger amount in an employer-sponsored plan than you can in an IRA, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.
The company would also benefit.
“These plans also can help to attract, retain and reward employees,” she said. “Contributions to the plan can give the business owner potential tax benefits as deductible business expenses.”
D’Agostini said there are several types of retirement plans that to consider.
Many companies have a 401(k), but with only two employees, this might not be appropriate because of the start-up and ongoing costs, D’Agostini said.
She’s not including a solo 401(k) here because those are only for business owners who have no employees.
So you could consider a SEP IRA, short for Simplified Employee Pension.
D’Agostini said these are relatively easy to set up and do not have any setup or annual fees.
“The employer would contribute up to 25 percent of the employee’s compensation up to a maximum of $54,000 for 2017,” she said. “The employer contributes the same percentage of compensation for every employee. You would not have to contribute every year.”
There is no annual plan filing with the IRS for this plan, D’Agostuni said.
And, you can contribute to your own IRA too, which extends the amount that you can save.
A SIMPLE IRA, short for Savings Incentive Match Plan for Employees Individual Retirement Account, is another option.
This is a salary reduction plan where both the employer and employee contribute, D’Agostini said.
“The employee can contribute up to 100 percent of their compensation up to a maximum of $12,500 for 2017,” she said. “There’s a catch-up contribution for employees age 50 or older of $3,000.”
This kind of plan would include a mandatory business contribution of a 100 percent match on the first 3 percent deferred — contributions could be as little as 1 percent in any two of five years — or a 2 percent nonelective contribution for all eligible employees, she said.
And, there’s a low cost to set up or a per participant fee.
Good luck in convincing your new boss!
Email your questions to Ask@NJMoneyHelp.com.
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.
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