4 ways to Retire as a Business Owner
As a small business owner, perhaps you've been wanting to start a retirement plan for some time now and just don't know where to start. To help you discover which retirement plan is best for you, I put together a list of my favorites. They are easy to set up and cost effective to maintain.
Did you know that 34 percent of small business owners lack retirement savings, according to Manta?
As a small business owner, perhaps you’ve been wanting to start a retirement plan for some time now. What’s holding you back?
Maybe you don’t know what the best retirement plan is for your business, because it feels like there are so many types to choose from and things like costs, contribution limits and deadlines make choosing one overwhelming.
To help you discover which retirement plan is best for you, I put together a list of my favorites. They are favorable to small business owners, easy to set up and cost effective to maintain.
Here are the four best retirement plans for small business owners.
1. SIMPLE IRA
If you have less than 100 employees, the SIMPLE (Savings Incentive Match Plans for Employees) IRA might be the best retirement plan for your business.
SIMPLE IRAs are easy to set up and ideally suited as a startup retirement savings plan for small business employers not currently sponsoring a retirement plan.
Contribution limits: With SIMPLE IRAs, participants can contribute up to $12,500 for those under the age of 50. Participants over the age of 50 can contribute an additional $3,000 per year, as a “catch up” incentive. In addition, employers can match employee contributions dollar-for-dollar up to 3 percent of their salary.
Deadline: SIMPLE IRAs must be established within a calendar year between January 1 and October 1.
2. SEP IRA
The Simplified Employee Pension (SEP) IRA plan is best suited to solopreneurs that want a headache-free way to contribute to retirement. A SEP IRA is easy to set up and doesn’t come with all the startup and operating costs of other retirement plans.
But be careful, while SEP IRA plans allow for employee contributions, it can become very expensive for employers saving aggressively since you must contribute the same percentage for employees that you make yourself.
Contribution limits: With SEP IRA plans, participants can contribute up to the lesser of $55,000 or 25 percent of their compensation for 2018. Participants over the age of 50 can contribute an addition $3,000 per year, as a “catch-up” incentive. Unfortunately, there’s no catch-up incentive offered to those under 50 years of age.
Deadline: SEP IRAs must be established by your company’s tax filing deadline (plus any extensions). For example, the 2018 tax filing deadline for many small business owners is April 15, 2019.
3. Solo 401(k)
Solo 401(k)s, also called one-participant 401(k) plans, are traditional 401(k) plans covering a business owner and his or her spouse. Other employees are not allowed to participate. However, unlike the SEP IRA, Solo 401(k) allows for salary deferrals, as well as profit sharing contributions.
Setting up a Solo 401(k) makes sense for sole proprietors, partnerships, as well as S and C Corporations. Unlike traditional 401(k)s, there’s no discrimination tests or Form 5500 filings.
What’s nice about the Solo 401(k) plan is that there’s no vesting schedule. Once you contribute to your account, the money becomes 100 percent vested immediately.
Contribution limits: With Solo 401(k) plans, business owners can defer up to $18,500 of their pre-tax income, and unlike the SEP IRA, Solo 401(k) plans allow business owners over the age of 50 to do the catch-up contribution of $6,000 for total of $24,000 per year.
In addition to the $18,500, as the business owner, you can also make a nonelective profit sharing of up to 25 percent of your pay (based on your W-2). Total contributions to a participant’s account (not including catch-up contributions) cannot exceed $55,000 for 2018.
Deadline: The Solo 401(k) plan must be established by your company’s fiscal year-end. For most small business owners, this is typically December 31. However, profit sharing contributions can be made up until your business’s tax filing deadline (plus any extensions). The 2018 tax filing deadline for most small business owners is April 15, 2019.
4. Roth IRA
The Roth IRA is by far one of my favorite types of retirement accounts. It’s not a small business retirement plan like the Solo 401(k), SIMPLE or SEP plans. There are no plan documents and you can’t offer this to your employees (unless it’s within a traditional 401(k) plan).
All you need to do is open a Roth IRA account,but all small business owners should be taking advantage of the Roth IRA.
A Roth IRA is a unique retirement account in that you fund using after-tax dollars. Unfortunately, you don’t get a tax break for contributing to it like you would with the 401(k), SEP, SIMPLE or IRA retirement accounts. However, as long as you are at least age 59 ½, all of the money you withdraw from this account is tax-free. That’s right! Even the growth in the account is tax-free.
That’s what makes the Roth IRA amazing. No other investment account allows you to take out money 100 percent tax-free.
This allows you use a Roth IRA strategically. You can potentially offset some of the taxes you’d have to pay when withdrawing money from your SEP, SIMPLE or Solo 401(k) retirement plans. Not only does this help you keep your taxes lower, but you also don’t have to withdraw as much money; allowing your money to grow longer.
Contribution limits: With Roth IRAs, you can make a contribution of $5,500 per year ($11,000 for married couples). The Roth IRA also allows for catch-up contributions of an additional $1,000 for those over the age of 50. In addition, you can contribute to a Roth IRA up until April 15, 2019 for the 2018 year.
Deadline: There are no plan documents required to setup a Roth IRA. You have until the 2018 tax filing deadline of April 15, 2019 to open an account and make contributions to it.
Take the first step
As an entrepreneur, I know how busy life can be when you're running a business. Most of us are just trying to meet the demands of today, let alone plan and think to the future. In the end, we started a business to enrich our lives, not have it suck the life out of us.
The first step is to fill out the retirement plan documents, which only takes 15 minutes and doing so will help you become more tax efficient, retain good employees and help you create a business and life you love. In addition, if you contribute to a retirement plan regularly, you can potentially offset your tax liabilities.