When you’re an employee, you might not worry too much about how to save for retirement – you ask your employer to take some money out of each paycheck, then they invest that in some sort of 401(k) or IRA. But, when you’re the employer, you have to put some more thought into it – not just for your own retirement, but for your employees’, too.
A lot of small business owners aren’t contributing to a retirement plan because they view their business as their retirement plan. They might hope to sell the company, then use the money from the sale to fund their retirement. Or, they plan to pass the company down to their kids, but keep some stake in the company, so they can keep making money off it. That’s dangerous though because you’re counting on someone wanting to buy your company for more than you have in it.
Other small business owners don’t contribute to a retirement plan because they don’t think they’re bringing in enough revenue to save anything. But, you can’t work forever, so it’s best to prepare now.
How Do I Decide Which Retirement Plan to Choose?
When you’re deciding how you’re going to save for retirement, ask yourself:
Do I have employees or expect to have employees in the future?
Is it important that my employees can contribute to their own retirement?
Do I care more about making higher contributions or having less of an administrative burden?
Do I want the plan contributions be deductible as a business expense?
Your answers to these questions will help you determine which retirement plan to choose. Keep reading to learn more about the 5 most common retirement plans for small businesses.
A Solo 401(k) is ideal if you have no employees (other than you and your spouse) because it helps you maximize your contribution. It recognizes that you’re both the employer and the employee and offers tax-deferred growth.
As an employee of your own company, you can contribute up to $18,500 a year. If you’re 50 or older, you can contribute up to $24,500. As the employer, you can contribute 25% of your compensation (20%, if you’re a sole proprietor or single-member LLC), up to $55,000. If you’re 50 or older, that amount increases to $61,000.
If your company is incorporated, you can deduct the contributions as a business expense. If your company is not incorporated, you can still deduct your contributions, but from your personal income.
A Solo 401(k) can be a little cumbersome to manage because you’ll have to have a plan administrator. Once your plan assets reach $250,000, you’ll also have to file Form 5500.
A Simplified Employee Pension (SEP) IRA is the most popular choice among small business owners. It offers low fees, a small administrative burden, and low maintenance requirements.
A SEP IRA can cover your employees, but is completely employer funded – your employees will not be able to contribute on their own.
As the employer, you can contribute up to 25% of an employee’s compensation, up to $55,000 a year. You’re not required to contribute every year, but you do have to contribute the same percentage to your employees’ accounts as to your own.
A Savings Incentive Match Plan (SIMPLE) IRA is great for businesses with fewer than 100 employees and is easy to setup and maintain.
Your employees can make contributions up to $12,500 each year ($15,500 if they’re over the age of 50).
As the employer, you also contribute to the account. You can either match each employee’s contribution dollar-for-dollar (up to 3% of their compensation) or you can contribute 2% of their contribution.
A SIMPLE 401(k) is an alternative to a SIMPLE IRA, if you want to avoid the administrative burden of a standard 401(k).
With a SIMPLE 401(k), employees can elect to contribute. But, you’re obligated to make a matching contribution up to 3% of each employee’s salary or a non-elective contribution of 2% of their salary.
As the employer, you’re obligated to file Form 5500.
A Roth IRA is used to supplement your retirement savings, if your income (as a sole proprietor) is eligible. (High earners are not eligible to fund a Roth IRA. If you’re a single filer, contributions phase out if you’re annual income is $133,000 or more. If you’re a joint filer, contributions phase out at an annual income of $196,000.)
You can fund a SEP IRA (or SIMPLE IRA) and a Roth IRA. Contributions into your Roth IRA are capped at $5,500 (or $6,500, if you’re over 50).
Contributions to a Roth IRA are made from after-tax income, so your assets grow tax-free and your distributions will be tax-free.
*We recommend that you speak with a financial advisor to determine the best option for you and your company. You can also visit the IRS website for more small business retirement resources.