Retirement Planning for Small Business Owners
As a small business owner, you’re in charge of planning for your retirement and may feel responsible for helping your employees with theirs. Here’s a simplified overview to help you navigate the options and make informed decisions.
Key Points:
Small business owners must plan for their own and their employees’ retirement. Relying on selling your business for a retirement profit isn’t always guaranteed, so it’s important to explore other retirement savings plans. Consider options like SIMPLE IRAs, SEP IRAs, traditional or Roth IRAs, and Solo 401(k)s.
Retirement plan options for small businesses:
✅ SEP-IRA: simplified employee pension plans are easy to set up and involve minimal paperwork. Employers make all contributions, up to 25% of an employee’s income or $69,000 in 2024. These plans are ideal for businesses with few employees due to their high contribution limits and flexibility.
✅ SIMPLE IRA: savings incentive match plan for employees allows both employer and employee contributions. The employee contribution limit for 2024 is $16,000, with an additional $3,500 for those 50 or older. Employers must match employee contributions up to 3% of compensation or make a 2% non-elective contribution.
✅ Traditional 401(k): allows employees to contribute a portion of their salary with tax-deferred earnings. The contribution limit for 2024 is $23,000, with an additional $7,500 for those 50 or older. Employers can also contribute, offering significant tax advantages.
✅ SIMPLE 401(k): similar to SIMPLE IRAs but with an additional option for employees to take loans against their accounts. Contributions are limited to $16,000, with catch-up contributions allowed for those 50 or older.
✅ Solo 401(k): designed for self-employed individuals, allowing contributions as both employer and employee. Contribution limits for 2024 are $23,000 for employee deferrals, plus employer contributions up to 25% of compensation, with a total cap of $69,000. If your business has no employees other than your spouse, a Solo 401(k) is ideal.
✅ Defined Benefit Plans: these plans provide a specified retirement benefit, usually based on salary and years of service. They are less common today but can offer generous benefits for high-income professionals who can manage administrative costs.
✅ SIMPLE IRA: savings incentive match plan for employees allows both employer and employee contributions. The employee contribution limit for 2024 is $16,000, with an additional $3,500 for those 50 or older. Employers must match employee contributions up to 3% of compensation or make a 2% non-elective contribution.
✅ Traditional 401(k): allows employees to contribute a portion of their salary with tax-deferred earnings. The contribution limit for 2024 is $23,000, with an additional $7,500 for those 50 or older. Employers can also contribute, offering significant tax advantages.
✅ SIMPLE 401(k): similar to SIMPLE IRAs but with an additional option for employees to take loans against their accounts. Contributions are limited to $16,000, with catch-up contributions allowed for those 50 or older.
✅ Solo 401(k): designed for self-employed individuals, allowing contributions as both employer and employee. Contribution limits for 2024 are $23,000 for employee deferrals, plus employer contributions up to 25% of compensation, with a total cap of $69,000. If your business has no employees other than your spouse, a Solo 401(k) is ideal.
✅ Defined Benefit Plans: these plans provide a specified retirement benefit, usually based on salary and years of service. They are less common today but can offer generous benefits for high-income professionals who can manage administrative costs.
Retirement Plan Contribution Limits
✌ Benefits of offering a retirement plan:
👉 Attract and retain talent: competitive retirement benefits can help attract and retain skilled employees.
👉 Tax advantages: businesses can qualify for tax credits, such as the Retirement Plans Startup Costs Tax Credit, and deductions for employer contributions.
👉 Employee well-being: helping employees save for retirement can improve morale and job satisfaction.
👉 Tax advantages: businesses can qualify for tax credits, such as the Retirement Plans Startup Costs Tax Credit, and deductions for employer contributions.
👉 Employee well-being: helping employees save for retirement can improve morale and job satisfaction.
SEP-IRA benefits and withdrawal rules:
✅Benefits: high contribution limits, minimal operational costs, and flexible funding options.
✅ Withdrawal rules: similar to traditional IRAs. Withdrawals before age 59½ may incur a 10% penalty plus taxes, and required minimum distributions (RMDs) begin at age 72.
✅ Withdrawal rules: similar to traditional IRAs. Withdrawals before age 59½ may incur a 10% penalty plus taxes, and required minimum distributions (RMDs) begin at age 72.
SIMPLE IRA benefits and withdrawal rules:
✅Benefits: simple setup and administration, with mandatory employer contributions ensuring meaningful retirement benefits.
✅ Withdrawal rules: distributions before age 59½ may incur a 10% penalty (25% if within two years of participation), plus taxes, with RMDs starting at age 72.
✅ Withdrawal rules: distributions before age 59½ may incur a 10% penalty (25% if within two years of participation), plus taxes, with RMDs starting at age 72.
How Small Business Owners Can Save Thousands on Taxes with SEP IRA and S Corp
Small business owners can achieve substantial tax savings by strategically combining a SEP IRA with an S Corporation. By establishing an S Corp, owners can pass income through to shareholders, avoiding double taxation and reducing their overall tax liability. Additionally, contributions to a SEP IRA are tax-deductible for the S Corp, further lowering taxable income.
This dual strategy not only maximizes retirement savings potential through tax-deferred growth but also minimizes self-employment taxes by structuring income as both salary and distributions. This approach not only strengthens financial security but also enhances cash flow for business reinvestment and growth.
This dual strategy not only maximizes retirement savings potential through tax-deferred growth but also minimizes self-employment taxes by structuring income as both salary and distributions. This approach not only strengthens financial security but also enhances cash flow for business reinvestment and growth.
401(k) contribution limits and benefits:
✅ Contribution limits: Up to $23,000 for 2024, plus $7,500 in catch-up contributions for those 50 or older. Employer matching contributions do not count toward the individual limit.
✅ Benefits: tax credits for plan startup, potential tax deductions for employer matches, and the option for auto-enrollment.
✅ Benefits: tax credits for plan startup, potential tax deductions for employer matches, and the option for auto-enrollment.
Challenges of offering 401(k)s
Small businesses often don’t offer 401(k)s due to a lack of resources, time, or knowledge. Setting up a 401(k) can be costly and complex, and not all businesses have access to trusted financial institutions to facilitate this.
Defined benefit vs. Defined contribution plans:
Starting a retirement plan
Yes, you can start a retirement plan on your own. The simplest way is to establish a traditional or Roth IRA and begin contributing. Depending on your situation, a Solo 401(k) might also be an option.
Starting a retirement plan
It’s essential to start planning your business exit strategy early. Your business might become your largest asset, and preparing it for sale can help ensure it operates smoothly without you. Market conditions can affect your ability to sell, so build flexibility into your retirement plan to sell during favorable conditions or work longer if necessary. Avoid a distress sale by planning well in advance to ensure you can sell your company at a premium.
Conclusion
Even if you plan to keep working, establishing a retirement plan gives you flexibility and peace of mind. Having options means you’ll feel more satisfied with whatever path you choose for your future. Consider Taxfully as a solution for your small business retirement plans. Taxfully is a tax firm specializing in helping small businesses with their retirement planning needs.
