Take-home message: When choosing a retirement plan that is right for your practice, conduct a thorough review of available options.
Money Matters By John J., John S., Traudy F. Grande, CFPs and the Wells Fargo Advisors
If you own a small business (such as a medical practice), many retirement plan alternatives are available to assist you and your eligible employees with retirement planning.
For most closely held business owners, a Simplified Employee Pension Individual Retirement Account (SEP IRA) was once the most cost-effective choice. Then, the Savings Incentive Match Plan for Employees (SIMPLE IRA) became a viable alternative.
Today, you may find that a defined benefit or 401(k) plan best suits most needs. To make an informed decision on which plan is right for your practice, review the differences carefully before choosing.
Simplified Employee Pension Individual Retirement Account (SEP IRA)
This plan is flexible, easy to set up, and has low administrative costs. An employer signs a plan adoption agreement, and IRAs are set up for each eligible employee. When choosing this plan, keep in mind that it does not allow employees to save through payroll deductions, and contributions are immediately 100% vested.
The maximum an employer can contribute each year is 25% of an employee’s eligible compensation, up to a maximum of $265,000 for 2015. However, the contribution for any individual cannot exceed $53,000 in 2015.
Employer contributions are discretionary and may vary from year-to-year. With this plan, the same formula must be used to calculate the contribution amount for all eligible employees, including owners. Eligible employees include those who are age 21 and older and those employed (both part time and full time) for 3 of the past 5 years.