As a small business owner, you’re used to giving your all to the business, but it’s important to know which self-employment plans make sense for your needs. Knowing what retirement plan options are available to you, and to offer your employees, if applicable, can allow you to remain on track.
You have options when it comes to determining which self-employed retirement plan can help you achieve your retirement goals while you focus on your business. Each plan has their own contribution limits, tax advantages, and employee benefits.
- Solo 401(k)
A solo 401(k) is designed for businesses with only one full-time employee, the business owner. The IRS calls it a one-participant 401(k) and only businesses without other full-time employees are eligible. Part-time employees are not eligible to participate in the plan with one exception — the owner’s spouse can participate.
There are many benefits to a solo 401(k), including higher contribution limits, Roth options and loan provisions. However, these accounts do have strict reporting requirements and rules about when you can access the funds.
If you have plans to expand your business and hire additional full-time employees, a solo 401(k) may not be the right choice for you.
- SEP IRA
A Simplified Employee Pension (SEP) IRA functions similarly to a traditional IRA, except as the owner, you set up and contribute to accounts for both yourself and your employees. These plans offer tax-deductible contributions, high contribution limits when compared to traditional IRAs, easy setup and maintenance, and discretionary contributions. This means you can adjust your contributions to match your cash flow so you’re never contributing more than you bring in.
Some drawbacks include strict eligibility requirements (everyone 21 and older who earns at least $650 per year must be allowed to participate), no loan provisions, Roth accounts or employee deferrals, and when you do contribute, you are required to contribute to every participating employee.
- SIMPLE IRA
A SIMPLE IRA plan is similar to a SEP IRA in that it allows employers to make contributions to employees’ retirement plans at lower start-up and operating costs than other retirement plans. But with a SIMPLE IRA, employees can also make their own contributions to retirement, which can be less expensive for employers. You must have less than 100 employees to be eligible for a SIMPLE IRA.
Benefits of a SIMPLE IRA include easy setup and maintenance, low administrative costs, tax-deductible contributions, and no filing or nondiscrimination requirements. If you have a SIMPLE IRA plan, you are ineligible to hold any other retirement plan. You are also required to make minimum contributions to employees’ plans each year and the contribution limits are lower than those for SEPs and solo 401(k)s. There is also a 25% penalty tax if you withdraw money from the plan within the first two years.
Join Washington Wealth Advisors’ Todd Youngdahl, CFP® and Ann Blakey, CFP® as they cover this important topic for small business owners and answer your questions at the Chamber’s Small Business Roundtable event on October 26, 2022.