Owning a small business is a rewarding investment Americans can make. Ideally, you get to work for yourself, set your hours, do what you want to do, and ultimately be your own boss. However, with this freedom, small business owners are stuck with a very important reality: they are responsible for their destiny. They are responsible for making sales, payroll, tax preparation, retirement savings, and providing reliable and quality services to customers, and if they drop the ball in any of these areas, customers, employees, and their own families can significantly suffer the consequences.
Whitaker-Myers is here to help lighten your load, from tax preparation with our CPA Kage Rush to Retirement planning with our team of Financial Advisors to our dedicated Insurance team. Although it would be great to do a deep dive into each of these areas, we will focus on retirement savings and ways you, as a small business owner, can save for retirement using tax-advantaged employer-sponsored retirement plans.
The four main Retirement plans for Business owners are:
SEP IRA
Simple IRA
Solo 401k
401k or 403b (pending if you are non-profit vs. profit; for the sake of this article, we are going to refer to it as 401k)
Simplified Employee Pension IRA (SEP IRA)
This is a retirement account where an employer can make contributions for eligible employees and claim those contributions as tax deductions. Another tax benefit of the SEP IRA is that the earnings grow tax-deferred.
Pros:
Can contribute up to $69,000 annually or 25% of annual income (lesser of the 2). This means if your annual income is $200,000, the max you can contribute is $50,000 (25%). However, if your annual income was $400,000, you could contribute $66,000.
Inexpensive to set up and maintain
Flexible investment options
$500 per year tax credit for employers who set up automatic enrollment
Cons:
Contribute equally to all qualified employees
Eliminates Backdoor Roth option
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA)
SIMPLE IRAs are retirement savings plans where employers can capitalize on tax deductions by making contributions for their employees. Employers are required to contribute every year until the plan is terminated. The employer can make non-elective contributions of 2% of the employee’s salary or match dollar-for-dollar up to 3% of the employee’s salary. Contributions made by the employer and the employees grow tax-deferred.
Pros:
Low administration and set-up costs
Flexible investment options
Little employee funding required
$500 per year tax credit for employers who set up automatic enrollment
Cons:
Low annual contribution Limits
$16,000 with a $3,500 catch-up for people 50 years or older
Eliminates Backdoor Roth IRA option
Only for businesses with fewer than 100 employees
Solo 401(k)
The Solo 401k is a tax advantage plan utilized for small business owners who never plan on hiring employees other than their spouse. Additional requirements for opening a Solo 401(k): you must produce your income from your business, and you or your spouse are responsible for running the business.
Pros:
Can contribute both as the employer and employee
People under 50 can contribute up to $69,000/annually
With a catch-up contribution of $7,500 for those 50 years or older
Still only have the tax advantage up to the IRS limit (2024: $23,000)
Can make Pretax or Roth Contributions
Can contribute to a Backdoor Roth IRA
Unlike the SEP IRA and SIMPLE IRA
Flexible investments
Cons:
As an employer, you can only contribute up to 25% of your compensation
Running a business is hard work, and preparing for retirement and running the business simultaneously makes it even harder. When trying to navigate retirement planning, here at Whitaker-Myers Wealth Managers, we have financial advisors trained to help you identify which plan is right for your situation and help educate your employees, preparing them for retirement. In business, we all know the most valuable asset is experienced, dedicated employees, and what better way to boost morale and provide an incentive to stay than to help prepare them for the future?
Retirement Plans for a Small Business Owner
May 13, 2024
Logan Doup
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