Retirement planning. You may not want to think about it, but setting up the right retirement account can be one of your smartest financial moves, especially if you are a small business owner.
Unlike an employee who might have access to a 401(k), you’ve probably realized by now that no one’s setting up that retirement fund for you—it’s all on you. While that can be intimidating, it’s also an incredible opportunity to put away significant sums for your future while slashing your taxable income today, and we’re here to help you get started.
The two most common retirement options for small business owners:
- SEP (Simplified Employee Pension) IRA – SEP IRA is one of the easiest retirement accounts to set up and maintain. It’s a great option if you’re self-employed or own a business with few or even no employees.
- Solo 401(k) – Solo 401(k), also called an Individual 401(k), is designed for self-employed individuals or business owners with no full-time employees (other than a spouse.)
Here’s how they compare:
Let’s Say You’re a Small Business Owner…
…and you make $150,000 a year.
With a Solo 401(k), you could potentially contribute $22,500 as the employee, plus around $37,500 as the employer, bringing your total to the maximum $66,000. That’s $66,000 less in taxable income, which could save you thousands in taxes, depending on your tax bracket. Not to mention the long-term benefits of tax-deferred growth in your retirement account!
With a SEP IRA, you’d still be able to contribute a similar amount based on your income, but without the flexibility to make both employee and employer contributions. It’s simple and powerful but lacks the higher contribution ceiling of the Solo 401(k).
But What About Employees?
Here’s where things get a little tricky: if you have full-time employees (other than your spouse), a Solo 401(k) is off the table—you’ll need to consider other options, like a traditional 401(k).
For SEP IRAs, if you have employees, you’re required to contribute the same percentage for each eligible employee as you do for yourself. This is great if you’re looking to help your team save for retirement, but it can get expensive if you’re trying to contribute the maximum amount for yourself.
If You Own Multiple Businesses
Be aware that the IRS looks at all businesses under common control as a single entity for retirement plan purposes. So, if you have employees in one company and none in the other, the rules will apply to both businesses as if they were one.
Which Plan is Right for You?
Setting up the right retirement account for your small business can be one of the best financial decisions you make, but it’s important to get it right.
Since retirement accounts come with rules, deadlines, and opportunities for tax savings, it’s a good idea to consult with a retirement planning specialist. They’ll help you figure out the best option for your specific situation and ensure you’re maximizing both your savings and your tax benefits.