Business owners wear many hats. Not only are they expected to provide an excellent product or service, but they also hold the responsibility of managing the company, hiring and training employees, ensuring technology is working smoothly and coordinating all of the other office tasks.
If you own a business, or are thinking about starting one, you may wonder what your options for retirement savings are. A Traditional or Roth IRA are certainly still available to you, but their annual contribution limits may be too small to make a meaningful impact all on their own. Luckily, there are a plethora of retirement plans that you may choose to participate in to set yourself up for a comfortable retirement.
Below we’ll cover three of the most popular among small business owners.
SEP IRAs are a tool used by many small businesses, especially those with few employees. They are straightforward to set up and have a low administrative burden.
Contributions are limited to 25% of compensation up to $58,000 in 2021. It is important to note that with these plans, employers are required to contribute the same pay percentage to each eligible employee. So if an employer chooses to contribute 15% to themselves, they will also need to contribute 15% to every eligible employee. Employees are not permitted to contribute to this plan on their own.
If you are a larger business, with up to 100 employees, you may have heard of the SIMPLE IRA.
One of the benefits of a SIMPLE is that employees are allowed to contribute through salary deferral, allowing them to save for their own retirement. Employers are required to match these employee contributions up to 3% of employee compensation, or they may choose to contribute a flat 2% to every eligible employee. These contributions to employees are deductible as a business expense.
In 2021 the contribution limit for a SIMPLE IRA is $13,500 with an additional $3,000 catch up contribution for those 50 and older. Contributions to your SIMPLE IRA are tax-deductible, but distributions will be taxed.
A Solo 401(k) is designed for business owners with no employees. This plan works similarly to a work sponsored 401(k) where you may choose your tax advantage either through a Traditional or Roth option. With the Traditional route, contributions will be pre-tax and you will be taxed upon withdrawal instead. Alternatively, you may choose to contribute to a Roth Solo 401(k), where your contributions will be after-tax but your distributions down the road will be tax-free.
If your spouse happens to work for your business, they are the only exception to the no-employees rule and may be covered under this plan.
Contributions to this plan can be both in elective employee deferrals and profit-sharing. The total 2021 contribution limit for a Solo 401(k) is $58,000 with a catch-up contribution of $6,500 permitted for those age 50 and older.
Whether you’ve owned your business for 30 years, or you are just starting to think about opening one, a retirement plan should be top of mind. SEPs, SIMPLEs and Solo 401(k)s are just some of the options out there for business owners to offer a savings strategy for themselves and their employees. If you’re not sure which is right for your business, or you’d like to discuss other options, let’s work together to find the most suitable plan to pursue your goals.
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This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.