3 Retirement Plans Every Small Business Owner Needs To Know About

Helen 200 x 200
By Helen Hartman, CRPC®

As a small business owner, there is a long list of financial decisions that you need to make on a daily basis. One of the most important decisions is figuring out how you will plan your retirement and the offerings of retirement accounts to your employees. Small business owners carry the added duty of handling retirement plans. It’s up to you to choose a retirement plan that you’ll be able to manage, will be flexible enough to suit your small business constraints, and will be able to sustain you throughout your retirement years. Here are three retirement plans that every small business owner needs to know about.

1. 401(k)

The 401(k) is a popular option for small business owners because it enables you to fortify your account in a short time if you are an individual with a strong financial base from which to contribute. When you are the employee as well as the business owner, as most small business owners are, you’ll be able to contribute up to $18,500 annually. If you happen to be over the age of 50, that limit is increased to $24,500. A notable benefit to this type of retirement plan for small business owners is that you are allowed to make an additional contribution of 25% of your own compensation, up to a maximum of $55,000. You can see why this is potentially a great retirement plan for small business owners who have a lot of money to contribute. Add to that the fact that if your spouse is also an employee you could be potentially contributing a combined $122,000 per year if you are each 50 years of age or older.

2. Simplified Employee Pension (SEP) IRA

If your business entity is set up so that you are the sole proprietor, you might like to consider the Simplified Employee Pension (SEP) IRA. This type of retirement account for small businesses is one of the easiest to set up and understand. It’s also typically the one with the least associated management fees. Even the regulations regarding contributions are simple compared to some other retirement accounts for small businesses. All you have to do is calculate the lesser of25% of your compensation or $55,000.00. That’s the maximum you can contribute per year for 2018. The maximum cap fluctuates to keep up with inflation, so you’ll need to consult with your financial planner to find out what current caps are. One of the benefits to this plan is that you can make your contribution after you file taxes. This seemingly small but beneficial detail enables you to ensure you have enough liquid assets to pay your tax bill first, so that you can make a more informed financial decision about how much to invest in your retirement account for small business owners. A potential downside to this plan is that while the employer can contribute on behalf of employees, employees cannot make contributions of their own. If you are looking for a retirement plan for small business owners where employees can also contribute, consider this next option.

3. Savings Incentive Match Plan for Employees (SIMPLE) IRA

This type of plan might be ideal for small business owners who want to offer plans to employees that allow for both employee and employer contributions. With this plan, you as the employer must either match your employees’ contributions to a maximum of 3% of their pay, or contribute 2% for every eligible employee regardless of whether they contribute. The annual contribution limit for 2018 is $12,500 per year, and $15,500 per year if you are aged 50 or more. One drawback to this retirement plan for small business owners is that any withdrawals within the first two years after you begin participating are subject to a hefty 25% penalty fee.

Since you are solely in charge of making your retirement plan decision, these three options are well worth your valuable time and consideration. Remember, the most important feature of any retirement plan is that it is affordable for your business, and meets your needs now and in the future. For more information about a retirement plan for business owner, and for the most up to date regulations governing those plans, contact us for a free initial consultation to see how we might be able to assist you and your business.

This information was developed as a general guide to educate business owners, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.


Get the Financial Advice and Services You Need

Simply complete this form and a financial advisor will contact you shortly to provide answers to your financial questions.