What is the Best Retirement Plan for Small S-corps?

In pondering your questions, I referred to the quickfinder guide. It contains a great summary of the key issues surrounding various retirement plan vehicles. Basically, there is almost no difference between a 401k and a sep-ira. In both, the maximum contribution is $45,000, the penalties for early withdrawal and excess contributions are the same, etc. The main difference is that a 401k must be set up before 12/31, while a sep ira must be set up before the return due date. The only other difference is that the 401k allows for loans, while the sep does not.

Since I'm not a financial planner, I'm not sure if there are differences in the types of investments allowed in the plans. That might be something to consider.

The only other major consideration is that, in the case of non-owner employees, depending on how the plan is structured, you may be required to make contributions to employee plans and you might subject yourself to rules regarding top heavy plans, etc.

I have clients who have both types of plans. Their decision as to which plan they chose, really came down to three things. First, how did they want their money to be invested and which vehicle provided the best investment options for their investment style. Second, the maintenance fees involved. Third, the effect it would have on non-owner employees. Generally, when employees are involved, most companies tend to favor 401k, because they are more recognized and employees tend to understand them better.

There can't be a "clear recommendation" because retirement plans are like shoes, different purposes, different designs.

For the 1-2 owners, I've used the SEP for many years, primarily due to its simplicity. As for your other client, I would put together several questions regarding employee participation, total amount available, will there be matching by the er, need for employee retention, goals of owner, etc. If there is a wide disparity between the ages of the owner and the employees, an age weighted plan may make sense.

If you need more information, I recommend going online to one of the big fund companies, Rowe Price, Vanguard,etc and reading their material.

I'm sure you know that retirement contributions are based upon W-2 wages and not shareholder distributions.

With wages of about $50,000 you may want to consider a Simple IRA. You can put in $10,500 a year plus a 3% company match ($1,500) and you only have to cover employees (3% match) who participate in the plan. The advantage of a 401k compared to a Sep IRA is that with a 401k you can put in an employee deferral plus the company contribution. So with $50,000 in wages you could put in an employee deferral of $15,500 plus the company could put in $12,500 for a total of $28,000. A Sep IRA could only put in $12,500 with wages of $50,000.