Let’s Talk Retirement for Small Business Owners

For example, an employer-sponsored retirement plan can benefit owners directly while attracting (and retaining) quality employees. Fortunately, the federal tax code offers several attractive retirement options tailored for small businesses. The best choice depends on various aspects such as company size, the employees’ capacity to contribute annually, and administrative duties the business owner is ready to handle. Here are just a few options many of our clients with small businesses have used over the years.

Simplified Employee Pension IRAs

Say hello to the Simplified Employee Pension (SEP) IRA. As a business owner, this option allows you to contribute to IRAs for yourself and your employees and comes with certain advantages like flexibility and simplicity. However, like all IRAs, employees are unable to take loans from their plan.

SIMPLE IRA

Another option with a similar name is the SIMPLE IRA, which is designed specifically for sole proprietors and businesses with 100 or fewer employees. It presents a cost-efficient method for owners and employees to contribute to retirement. However, the pre-tax salary deferral limits in a 401(k) are higher, which may interest those looking for greater opportunities to contribute.

Small Business 401(k)s

This option allows individual participants to defer on a pre-tax basis or through after-tax Roth contributions. In addition, a Small Business 401(k) allows you to make matching, profit-sharing, or other special types of contributions.

However, this option may also require more paperwork. Depending on the regulations where your business is registered, small business 401(k)s may be required to perform annual tests to ensure the contributions and benefits under the plan do not discriminate in favor of highly compensated employees. Many small businesses hire a third-party administrator to help keep up with IRS requirements, which adds to the plan’s cost.

Know the Rules

This email is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before implementing or modifying a retirement plan.

Distributions from SIMPLE-IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.

Much like SIMPLE-IRAs, SEP-IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.

With a 401(k), distributions start in the year you turn 73. Withdrawals are taxed as ordinary income, and, if taken before age 59½, may be subject to a 10 percent federal income tax penalty.

We’re Ready to Help

We understand that your business and retirement needs are unique. That’s why we’re ready to help you decide on the best retirement for you and your business. As a financial professional, I’m here to help you navigate these critical decisions.

Feel free to reach out when you’re ready to discuss the elements of retirement for small business owners in more depth. Your entrepreneurial spirit has built a thriving enterprise—let’s bring that same can-do approach to your retirement journey.

-Don

^{Source: DOL.gov, November, 2023. “Choosing a Retirement Solution for Your Small Busine}