To the Self-Employed: Know your Retirement Options Beyond the Value of your Business.

Your business provides income today but what is your plan for generating income during retirement? Planning now is important: you most likely do not want to work until your last breath, rely on an employee or family member buying your business, or you may not have a sellable business. The “one man with a van” business can provide great income today but it may not be an asset you can sell tomorrow, especially if the business is you. Social Security may or may not be available when you want to retire, depending on age, and it was only intended to provide roughly a third of your retirement income needs. So, how do you come up the rest? You plan and contribute to retirement plans available to you today!

What are your options? As a small business owner, the IRS gives you five basic choices to save for your retirement in a tax efficient way.

IRA/ROTH IRA

An IRA is individually owned and has a small contribution limit of $7,000 ($8,000 if over age 50). There are no payroll tax savings with IRAs because they are funded individually, not by the business. Anyone can have one who has earned income. As a business owner, you may be able to have one in addition to any of the following retirement plan options. Maximizing an IRA can help to enhance your assets when added to the additional options available to you as a business owner. 

SEP IRA

Simplified Employee Pension (SEP) Plans are entirely funded by the employer for the benefit of all your employees. A SEP IRA can be a great option for sole proprietors and partnerships without other employees. You have the ability to contribute the lesser of 25% of your income or $69,000. Utilizing this option means, you must contribute the same percentage to all participants. An example of who would use a SEP IRA could be a married couple looking to maximize their contribution potential or a partnership team (doctors / attorneys) with similar financial goals. 

SIMPLE IRA

Savings Incentive Match Plan for Employees (SIMPLE) are very easy to administer, hence the name SIMPLE IRA. They have a contribution limit of $16,000 per employee as a payroll deduction or $19,500 if over age 50.  Participating employees can help you save on payroll taxes and as an employer, you can match employee contributions dollar for dollar up to 3% of their pay. Plus, there are NO DIRECT ADMIN COSTS! Pre-tax and post-tax (ROTH) contributions are allowed. This option gives your employees the option of choosing to pay tax on the seed or the harvest, as well as some other financial planning benefits. 

Solo 401(k)

A Solo 401(k), also known as an individual 401(k), is ONLY for sole proprietors or spousal owners with no other W-2 employees. They come with a $23,000 contribution limit or $30,500 if over age 50 for 2024 and are very inexpensive to administer. Pre-tax and post-tax (ROTH) contributions are allowed providing great flexibility for financial planning in the future. Profit sharing can increase your contribution limit to $69,000 per person, depending on income. In addition, loans are available on the plan, unlike all IRAs. A Solo can be an excellent option for an individual or a married couple who are motivated to save and have the income to allow it. Costs will generally run about $120 to $250 per year to administer.

401(k)

A 401(k) has the same contribution limits ($23,000 or $30,500 if over age 50) as Solo 401(k) but is meant for employees and owners alike. All the same provisions apply except the costs can be from $3000 to $4,000 per year to administer. It is meant as an option for businesses with two or more employees while offering an employer match and profit sharing. It’s a good option if you want to save beyond the SIMPLE IRA limits and have employees on payroll. Additionally, the IRS provides tax incentives for 401k plans, which can help pay a significant portion of your fees for the first several years. You can also implement automatic employee enrollment and increasing contributions to help employees save more into the plan over time. Automatic enrollment will become mandatory in 2025 due to SECURE 2.0 Act. 

How do you choose?

I highly suggest working with a licensed financial advisor. Together, you will look at the number of employees at your business, the amount you want to save, and administration costs. If you have no employees than a Solo 401(k) may be a great fit. If you have a handful of employees and do not expect to contribute more than $16,000, then a SIMPLE might be a great option. If your business size and savings goals increase you can adjust to a 401(k) when the time comes. Don’t forget, you can add an IRA or Roth IRA account to your personal financial plan to maximize your saving potential!

Consider this too, often a retirement plan is not only a great way for the business owner to save, but also a tool to help attract and retain valuable employees.  It shows your commitment to your staff and makes you more desirable as an employer. Utilizing a retirement plan is one component of helping yourself achieve a financially sound retirement. Banking on the sale of your business may not be a foolproof strategy for long term financial freedom. As a business owner, you know the hard work and stress of running a business; having a plan to build wealth beyond your business will help you enjoy the fruits of your labor and provide the income needed to have a secure retirement.