Law in the Marketplace: Business start-ups and IRAs

Most individuals who start new businesses in New Hampshire are fairly young when they do so — roughly in their late 20s to early 40s. And they should know not only about their businesses but also at least the basics about IRAs, qualified plans, ESAs and HSAs, and they should know that just as one’s younger years are often the best time to start a new business, they are also the best time to start these plans. The younger the better.

Here are the basics you should know about IRAs, qualified plans, ESAs and HSAs:

— IRA is the acronym for “individual retirement account.” There are two main types of traditional IRAs: SEP-IRAs and SIMPLE IRAs. SEP-IRAs are mainly for individuals with no employees. SIMPLE IRAs are for individuals who are employers or employees in small businesses.

— Both types of traditional IRAs provide a triad of important federal income tax advantages: First, contributions to IRA trust accounts are deductible from participants’ taxable income; second, the appreciation of the funds in these accounts are not subject to federal tax; third, when participants withdraw funds from their IRAs, they usually do so after their retirement, when their federal income tax rate is much lower than before retirement.

— There are also federally tax-favored retirement arrangements called “qualified plans” — eg, 401(k) plans. However, the establishment and maintenance of these plans can be complex and expensive, so they are not usually suitable for smaller businesses.

— IRAs and qualified plans can be either “traditional” plans — ie, the kind described above; or they can be “Roth” plans — ie, plans to which contributions are not deductible but withdrawals from which are not taxable.

— Two types of plans that have certain federal income tax similarities with IRAs and qualified plans are Educational Savings Accounts (“ESAs”) and Health Savings Accounts (“HSAs”). ESAs can provide significant federal income tax savings to parents who make contributions to them to educate their children. HSAs can provide major savings to individuals who make contributions to them to cover individual and family health expenses.

The federal laws and regulations covering all of the above arrangements are complex. For example:

— The limits on contributions to these plans vary widely from plan to plan.

— Special rules govern the times when plan holders may make withdrawals from these plans and when they must make withdrawals.

— Individuals must consider numerous factors in deciding whether to participate in traditional plans or in Roth plans.

Thus, before individuals establish or participate any of these plans, they should consult with accountants, lawyers or financial advisors who have a comprehensive and practical expertise about them.

I myself am not an expert about IRAs, qualified plans, ESAs or HSAs; I’m merely a generalist about them. But I know enough to know that I owe it to my clients to refer them to experts when they are starting their businesses or as soon as possible thereafter.

And in future columns, generalist that I am, I’ll do my best to spell out further information about each type of plan to the extent I think it may be useful to readers.

John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, PA Contact him at 856-7172 or [email protected]. His website is For access to all of his Law in the Marketplace columns, visit

Law in the Marketplace is a legal advice column. It runs every week in the Sunday Business section. The author is a lawyer in Concord and not a member of the Monitor’s staff.

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