There’s nothing like owning a business and being in charge of your own destiny. The freedom, the potential, the drive. Any successful business owner will tell you it comes down to having a good business plan. And if you want your business to succeed, shouldn’t you want the same for your retirement?
You might not have an employer-provided 401(k) plan, but that doesn’t mean you don’t have options to plan for your future. Here are four retirement strategies for small business owners.
The savings incentive match plan for employees, or SIMPLE IRA, is one retirement plan available to small businesses. If your business has employees, this is a great option. In 2020, employees can defer up to $13,500 of their salary, pretax, and those who are 50 or older can defer up to $16,500 by taking advantage of a $3,000 catch-up contribution.
Employers can match employee contributions to a SIMPLE IRA up to 3% of the employee’s compensation. Additionally, employers can contribute 2% of each eligible employee’s compensation of up to $285,000 in 2020. Employer contributions are tax-deductible.
A simplified employee pension (SEP) is another type of individual retirement account to which small businesses and their employees can contribute. In 2020, employees can make pretax contributions of up to 25% of income or $57,000, whichever is less. Similar to a SIMPLE IRA, a SEP allows small business owners to make tax-deductible contributions on behalf of eligible employees, and employees won’t pay taxes on the amounts an employer contributes on their behalf until they take distributions from the plan when they retire.
Roth or traditional IRAs
If you don’t have employees besides yourself, or your business doesn’t offer employee retirement benefits, Roth or traditional IRAs are options for you to save for your own retirement.
Roth IRAs let you contribute after-tax dollars and take tax-free distributions in retirement, while traditional IRAs allow you to contribute pretax dollars, but you’ll pay tax on the distributions. The most you can contribute to an IRA in 2020 is $6,000, or $7,000 if you’re 50 or older. You’re also able to contribute to an IRA on your spouse’s behalf.
Solo 401(k) plans, often referred to as SBO 401(k) plan, is a retirement savings option for small businesses whose only eligible participants in the plan are the business owners (and their spouses, if they are employed by the business too). It can be a great way for someone who is a sole proprietor or an independent consultant to set aside a decent-sized nest egg for retirement. These plans are popular options because they are relatively simple and inexpensive to set up.
There are two components to the SBO 401(k) plan: employee elective-deferral contributions and profit-sharing contributions.
- Employee Contribution Limits: You may make a salary-deferral contribution of up to 100% of your compensation but no more than the annual limit for the year. For 2020, the limit is $19,500, plus $6,500 for people age 50 or over.
- Employer Contribution Limits: The business may contribute up to 25% of your compensation (20% in the case of a sole proprietor or a Schedule C taxpayer) but no more than $57,000 for 2020. An employee age 50 or above can still contribute an additional $6,500 in 2020.
Unlike being an employee at a company, owning your own business doesn’t always come with a quitting time – business owners seem to be constantly working in some way or another. And some business owners might feel like retirement will be the same. Maybe they want to work in some capacity and never fully retire. Even so, saving and planning for your future is a good idea and could help relieve some stress should your retirement plan change down the road.
If you’re struggling with what retirement option to choose as a small business owner, give us a call. We’d love to discuss your options further and create a plan that’s best for you.