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Understand retirement planning options that help you keep more of what you earn, while also investing in your future.

Help take the guesswork out of which plan could be right for you with a 5-minute quiz

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Self-Employed 401(k)

A 401(k) plan for a self-employed individual with no employees other than a spouse.

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Easy-to-maintain plan for a self-employed individual or small-business owner, with fewer than 5 employees 1 .

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A low-complexity plan for businesses with fewer than 100 employees looking to offer a retirement benefit.

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Fidelity Advantage 401(k)

An affordable plan for small businesses looking to offer a 401(k) for the first time.

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Fidelity 401(k)

An industry-leading 2 , customizable 401(k) that supports existing plans $1M and up.

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Investment-only account 3

A brokerage account for those who have their own separate retirement plan document.

Whether it’s just you or you and your employees, we have a retirement plan that’s right for you. Take a look at how they compare and find one that fits your needs.

Already have a 401(k) plan with another provider? Learn more about the support and value we can deliver with a Fidelity 401(k).

If you have a separate retirement plan established and you’d like to invest the assets in a Fidelity brokerage account, you may be interested in an investment-only retirement account. 3

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SEP IRA : Self-employed individual or small business owner, primarily those with only a few employees. 1

Fidelity Advantage 401(k) : Small and medium- sized businesses looking to offer a 401(k) for the first time.

SIMPLE IRA : Self-employed individuals or businesses with 100 or fewer employees.

How do contributions work?

SE 401(k) : Employers may contribute up to 25% of compensation, up to a maximum of $69,000 in 2024 ($76,500 if age 50 or older).⁵ Employees may contribute up to $23,000 for 2024 ($30,500 if age 50 or older).⁵

SEP IRA : Employers may contribute between 0% and 25% of compensation up to a maximum of $69,000 for 2024.⁵ Each eligible employee must receive the same percentage.

Fidelity Advantage 401(k) : Employers make matching contributions, up to 4% of the annual gross compensation of all employees.⁴ Employees may contribute up to $23,000 for 2024 (catch up contributions available).⁵

SIMPLE IRA : Employers contribute either a matching contribution of 1, 2, or 3% or a non-elective contribution of 2%. 7 Participants may contribute up to 100% of compensation with a maximum of $16,000 for 2024 ($19,500 if age 50 or older). 8

Who can contribute?

SE 401(k) : As someone who's self-employed, you can contribute as both employer and employee.

SEP IRA : Only the employer can contribute.

Fidelity Advantage 401(k) : Both employees and employers can contribute.

SIMPLE IRA : Both employees and employers can contribute.

What about fees and tax credits?

SE 401(k) : There are no account fees and no minimum to open an account, $0 commission for online US stocks and ETF trades.⁶

SEP IRA : There are no account fees and no minimum to open an account. $0 commission for online US stocks and ETF trades.⁶

Fidelity Advantage 401(k) : There are no additional management fees or, with limited exceptions, fund expenses beyond the $300 per quarter fee.

SIMPLE IRA : There are no account fees and no minimum to open an account, $0 commission for online US stocks and ETF trades.⁶

When can withdrawals be made?

SE 401(k) : You can take a withdrawal once you’ve had a triggering event, such as disability, plan termination, turning age 59 ½ or older, and a few others. However, some withdrawals may incur a 10% penalty. 4

SEP IRA : You can withdraw at any time, but a 10% penalty may apply if you're not yet age 59½. 4

Fidelity Advantage 401(k) : You can take a withdrawal once you’ve had a triggering event, such as disability, plan termination, turning age 59½ or older, and a few others.⁴ However, some withdrawals may incur a 10% penalty. In the event of certain types of financial emergencies, you may be able to take a hardship withdrawal.

SIMPLE IRA : You can withdraw at any time, but a 10% (or 25% if within the first two years of participation) penalty may apply if you're not yet age 59½. 4

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5 Self-Employed Retirement Plans to Consider

Elizabeth Ayoola

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Being self-employed gives you a certain measure of freedom, but it doesn’t give you an excuse to skip out on saving for retirement.

In fact, it makes putting money away that much more crucial: Unlike an employee who might have access to a 401(k), you’re on your own.

And you might think you'll eventually sell the business and use that money to fund retirement, but what if you don't? Consider a retirement account not only a cushion, but also a tax-advantaged way to reduce income in your high-earning years.

First, you'll want to figure out how much you need to save for retirement with NerdWallet’s retirement calculator . The amount you plan to save each year will help determine the best account for you.

Then decide where to put that money. The good news is that flying solo gives you a lot of options. Here are five self-employed retirement plans that may work for you:

Traditional or Roth IRA

Solo 401(k)

Defined benefit plan

Capitalize

on Capitalize's website

1. Traditional or Roth IRA

Best for: Those just starting out. If you’re leaving a job to start a business, you can also roll your old 401(k) into an IRA .

IRA contribution limit : $7,000 in 2024 ($8,000 if age 50 or older) .

Tax advantage: Tax deduction on contributions to a traditional IRA; no immediate deduction for Roth IRA, but withdrawals in retirement are tax-free.

Employee element: None. These are individual plans. If you have employees, they can set up and contribute to their own IRAs.

» In just a few minutes, you can open an IRA at an online brokerage. Review NerdWallet's picks for the best IRA providers to get started.

The details

An IRA is probably the easiest way for self-employed people to start saving for retirement. There are no special filing requirements, and you can use it whether or not you have employees.

The toughest part might be deciding which type of IRA to open: We’ve given in-depth coverage to the differences between traditional and Roth IRAs , but the tax treatment of a Roth IRA might be ideal if it’s early days for your business (read: you’re not making much money). In that case, your tax rate is likely to be higher in retirement, when you’ll be able to pull that money out tax free. Roth IRAs also don't have required minimum distributions, and Roth IRAs can be transferred to your heirs , tax-free.

One note: The Roth IRA has income limits for eligibility; those who earn too much can't contribute.

» Learn more about IRAs

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2. Solo 401(k)

Best for: A business owner or self-employed person with no employees (except a spouse, if applicable).

Contribution limit: For 2024, it's $69,000, plus a $7,500 catch-up contribution or 100% of earned income, whichever is less [0] IRS.gov . 2024 Limitations Adjusted as Provided in Section 415(d), etc. . Accessed Mar 16, 2022. View all sources , whichever is less. To help understand the contribution limits here, it helps to pretend you’re two people: An employer (of yourself) and an employee (also of yourself).

In your capacity as the employee, you can contribute as you would to a standard employer-offered 401(k), with salary deferrals in 2024 of up to 100% of your compensation or $23,000, plus that $7,500 catch-up contribution, if eligible, whichever is less.

In your capacity as the employer, you can make an additional contribution of up to 25% of compensation. Employer contributions must be made by the tax filing deadline , or extension date if applicable.

There is a special rule for sole proprietors and single-member LLCs: You can contribute 25% of net self-employment income, which is your net profit less half your self-employment tax and the plan contributions you made for yourself.

The limit on compensation that can be used to factor your contribution is $345,000 in 2024.

Tax advantage: This plan works just like a standard, employer-offered 401(k): You make contributions pretax, and distributions after age 59½ are taxed.

Employee element: You can’t contribute to a solo 401(k) if you have employees. But you can hire your spouse so they can also contribute to the plan. Your spouse can contribute up to the standard employee 401(k) contribution limit , plus you can add in the employer contributions, for up to a total of $69,000 in 2024, plus catch-up contribution, if eligible. This potentially doubles what you can save as a couple.

How to get started: You can open a solo 401(k) at many online brokers. You’ll need to file paperwork with the IRS each year once you have more than $250,000 in your account.

This plan, which the IRS calls a “one-participant 401(k),” is particularly attractive for those who can and want to save a great deal of money for retirement or those who want to save a lot in some years — say, when business is flush — and less in others.

Keep in mind that the contribution limits apply per person, not per plan — so if you also have outside employment that offers a 401(k), or your spouse does, the contribution limits cover both plans.

One other thing to know: You can also choose a solo Roth 401(k) , which mimics the tax treatment of a Roth IRA. Again, you might go with this option if your income and tax rate are lower now than you expect them to be in retirement.

» Learn more about the solo 401(k)

Best for: Self-employed people or small-business owners with no or few employees.

Contribution limit: The lesser of $66,000 in 2023, $69,000 in 2024, or up to 25% of compensation or net self-employment earnings, with a $330,000 limit on compensation ($345,000 in 2024) that can be used to factor the contribution. Again, net self-employment income is net profit less half of your self-employment taxes paid and your SEP contribution. No catch-up contribution. Be sure to make your contributions by the federal income tax filing deadline, usually mid-April, or the extension deadline if filing for extension.

Tax advantage: You can deduct the lesser of your contributions or 25% of net self-employment earnings or compensation — limited to that $330,000 cap per employee in 2023 ($345,000 in 2024) — on your tax return. Distributions in retirement are taxed as income. Previously, there was no Roth version of a SEP IRA. Under legislation signed by President Biden in December 2022, Roth contributions are now allowed [0] Senate.gov . SECURE 2.0 Act of 2022 . View all sources .

Employee element: Employers must contribute an equal percentage of salary for each eligible employee, and you are counted as an employee. That means if you contribute 10% of your compensation for yourself, you must contribute 10% of each eligible employee’s compensation.

Get started: You can open a SEP IRA at many online brokers just as you would a traditional or Roth IRA, with a few extra pieces of paperwork.

A SEP IRA is easier than a solo 401(k) to maintain — there’s a low administrative burden with limited paperwork and no annual reporting to the IRS — and has similarly high contribution limits. Like the solo 401(k), SEP IRAs are flexible in that you do not have to contribute every year.

The downside for you, as the business owner, is that you have to make contributions for employees, and they must be equal — not in dollar amount, but as a percentage of pay — to the ones you make for yourself. That can be costly if you have more than a few employees or if you’d like to put away a great deal for your own retirement. You cannot simply use a SEP to save for yourself; if you contribute for the year, you have to make contributions for all eligible employees.

» Learn more about SEP IRAs

types of retirement plans for small business owners

4. SIMPLE IRA

Best for: Larger businesses, with up to 100 employees.

Contribution limit: Up to $15,500 in 2023, plus catch-up contribution of $3,500 in 2023 if you're 50 or older (up to $16,000, plus a catch-up contribution of $3,500 in 2024). If you also contribute to an employer plan, the total of all contributions can’t exceed $22,500 in 2023 or $23,000 in 2024. Contributions must also be made by tax day or the extension deadline if applicable.

Tax advantage: Contributions to a traditional SIMPLE IRA are deductible, but distributions in retirement are taxed. Contributions made to employee accounts are deductible as a business expense. The legislation signed into law in December 2022 allows for Roth contributions, effective in 2023.

Employee element: Unlike the SEP IRA, the contribution burden isn’t solely on you: Employees can contribute through salary deferral. But employers are generally required to make either matching contributions to employee accounts of up to 3% of employee compensation, or fixed contributions of 2% to every eligible employee. Choosing the latter means the employee does not have to contribute to earn your contribution. The compensation limit for factoring contributions is $330,000 in 2023, $345,000 in 2024.

Get started: The process is similar to a SEP IRA — you can open a SIMPLE at an online broker, with a heavier paperwork load than your standard IRA.

If you’re the owner of a midsize company with fewer than 100 employees, the SIMPLE is a fairly good option, as it’s easy to set up and the accounts are owned by the employees.

SIMPLE IRA contribution limits are significantly lower than a SEP IRA or solo 401(k), however, and you may end up having to make mandatory contributions to employee accounts, which can be expensive if you have a large number of employees who participate. Here's more on the SIMPLE IRA vs. a 401(k) .

The traditional SIMPLE IRA is also inflexible, particularly early on: Early withdrawals, before age 59½, are treated the same as early 401(k) or IRA distributions, in that they are taxed as income and subject to 10% penalty. But if you make a withdrawal within the first two years of participation in a SIMPLE IRA, the 10% penalty is increased to 25%. That means you also can’t roll over a SIMPLE to another retirement account within that two-year period. Zing.

One other thing to know: There is a 401(k) version of a SIMPLE, which works in much the same way but allows participants to take loans from their accounts. This version requires more administrative oversight and can be more expensive to set up.

» Learn more about the SIMPLE IRA

5. Defined benefit plan

Best for: A self-employed person with no employees who has a high income and wants to save a lot for retirement on an ongoing basis.

Contribution limit: Calculated based on the benefit you’ll receive at retirement, your age and expected investment returns.

Tax advantage: Contributions are generally tax deductible, and distributions in retirement are taxed as income. An actuary must figure your deduction limit, which adds an administrative layer.

Employee benefit: If you have employees, you generally offer this plan to them and make contributions on their behalf.

Get started: Your options for brokerages are more limited than with the above accounts, but Charles Schwab offers defined benefit plans.

People often lament the decline of pension plans, and this is exactly that: If you’re self-employed, you can set up your own pension — a guaranteed stream of income — in retirement by using a defined benefit plan.

So why wouldn’t everyone do it? They’re expensive, with high setup and annual fees. If you have employees, that fee will likely go up, and you’ll need to contribute on their behalf. They carry a heavy administrative burden each year, and they require a commitment to fund the plan with a certain amount per year. If you need to change that amount, you’ll pay additional fees. To make it worth it, you'd need to continue the plan for at least three years, financial advisors say.

The upsides are that you can stash a lot of cash in these, and you can defer taxes until retirement. If you’re fairly close to retirement, earning a high income that you know you’ll maintain and that allows you to save a significant amount per year — we’re talking $50,000 to $80,000 or more — you might consider using this plan to supercharge your savings efforts.

» Thinking about the future? Learn about succession planning for your business .

Where to open a retirement plan if you’re self-employed

Once you’ve decided to open one of these accounts, you’ll have to decide where to do it.

Most online brokers will allow you to open the four most common account types: IRA, solo 401(k), SEP IRA and SIMPLE IRA. » Ready to get started? Seek our picks for the best IRA providers

Each broker will walk you through the process of opening one of these accounts and explain any paperwork you may need to file with the IRS. But to be on the safe side, you may also want to work with an accountant.

Most financial advisors can also set up retirement plans for you.  

» Want help planning for retirement? Check out our retirement planning guide .

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Small plan 401(k), see what vanguard assets qualify.

Eligibility is first calculated using qualifying assets for an individual client. We then combine the qualifying assets of clients sharing a residential address to determine final eligibility*.

Assets that qualify

  • Any assets under management of Vanguard Personal Advisor Services .
  • Vanguard mutual funds and Vanguard ETFs held by a client in certain personal accounts qualify. Personal account types include: individual non-retirement, education savings accounts, IRAs, Joint, Trust, Custodian, Guardian, UTMA, UGMA, Estate, Sole Proprietorship, and Single-Participant SEP IRA plans.

Note: Vanguard assets in a Vanguard 529 Plan, Vanguard Variable Annuity, Multi-participant SEP IRA plans, SIMPLE, i401k, 403(b), family partnership, family corporation, or employer-sponsored retirement plans for which Vanguard provides recordkeeping services may be included in determining eligibility if you also have a personal account holding Vanguard mutual funds or Vanguard ETFs. Assets held in other account types are not eligible to be included in service eligibility determination.

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The qualification criteria (for example, asset levels) are reviewed periodically and could change at any time. Vanguard reserves the right to discontinue enrollment in any of these services or reassign any investor, without prior notification, to the appropriate service level if the investor fails to continue to meet the applicable qualification criteria. Vanguard reserves the right to amend or cancel selected features and benefits at any time without prior notification.

In addition, ongoing access by any particular investor to individual services, discounts, and exemptions is subject to periodic review and may be restricted based upon criteria established solely by Vanguard. While these services are complimentary, some underlying services may charge fees and expenses. Vanguard does not guarantee any level of service.

*Business addresses and other non-residential addresses are not eligible to be aggregated for purposes of determining services.

*Self-employed individuals must calculate their maximum contribution using the rate table or worksheets in Chapter 5 of IRS Publication 560 Retirement Plans for Small Business , or see a tax advisor.

**For plans with $2 million or more in assets or plans using an advisor or investment fiduciary service.

All investing is subject to risk, including the possible loss of the money you invest.

The Best Retirement Plan Options for Small Business Owners 2024

Table of contents.

types of retirement plans for small business owners

What are employee retirement plans?  

Employee retirement plans help provide workers with income after they retire. These are viewed as a form of workplace benefit, and there are various ways that employers might structure their retirement plans and contribute to them on behalf of their employees. 

Editor’s note: Looking for the right employee retirement plan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

Choosing the right retirement plan for your small business starts with researching all of the options available to you and your employees. Analyze who your employees are and what retirement plan options make the most sense for them, then choose one that aligns with your small business needs and values.

If you already know which type of plan you want, check out our recommendations for the best employee retirement plan providers.

What are the types of retirement plan types? 

Employers have options when it comes to offering retirement plans to their workers based on the size of their business, employees’ needs and other considerations. Here, we take a look at the various plans available.

Several different types of small business retirement plans are available and plan providers have affordable, accessible options designed for even very small businesses. There are also some tax advantages that can offset the expense of sponsoring a small business retirement plan.

Traditional 401(k)

This is perhaps the best-known type of retirement plan. The difference between individual retirement account (IRA) and 401(k) plans is that 401(k) plans allow employees to contribute a higher dollar amount to their accounts, to take out loans from their retirement savings and, usually, a choice of pretax and Roth contributions:

  • Cost per employee: Varies by plan provider. Look for all-inclusive providers that work with small businesses. Most charge a setup fee, monthly (or annual) administrative and per-participant fees and an investment or advisory fee. Plan participants pay exchange-traded fund (ETF) and mutual fund expense ratios as well as fund trades.
  • Contribution structure: Employee participation is optional and often allows them to make pretax contributions through salary deferrals or after-tax Roth contributions. Employer contributions are optional, but you can set a vesting schedule that allows you to reclaim a percentage of the business’ contributions if an employee leaves the company before a set time.
  • Roth 401(k) vs. traditional 401(k): A Roth 401(k) is a variation of the traditional 401(k) that allows plan participants to make after-tax contributions rather than pretax salary deferrals. After-tax contributions aren’t deductible since employees have already paid income tax on them. The advantage is that their money grows tax-free, so it isn’t taxed when they withdraw it.
  • 2023 contribution limits: $22,500 for employees or $30,000 for employees age 50 and older. Employers can contribute up to 25% of the employee’s compensation, but the contribution totals ― employee and employer contributions ― must not exceed $66,000 or $73,500 for employees age 50 and older who make catch-up contributions. This plan is subject to nondiscrimination testing, which ensures it doesn’t favor highly compensated employees. As such, the business owner and high-earning employees may need to reduce their contributions to pass this test.
  • Type of filing: You’re required to submit an Annual Return/Report of Employee Benefit Plan ― also known as IRS Form 5500 ― with this plan. As mentioned in the point above, this plan requires nondiscrimination testing.
  • Ideal for established small businesses that wish to use a vesting schedule to encourage talent retention or prefer not to match or contribute to employee retirement accounts.

Safe harbor 401(k)

A safe harbor 401(k) is a variation of the traditional 401(k) plan that isn’t subject to an annual IRS nondiscrimination test. This allows the business owner and highly compensated employees to make maximum contributions to their retirement accounts. However, employers are required to match or contribute to employee retirement accounts and these funds are immediately 100% vested:

  • Cost per employee: Varies by plan provider, but those offering all-inclusive plans for small businesses tend to be less expensive. Most charge a setup fee, monthly (or annual) administrative and per-participant fees and an investment or advisory fee. Plan participants pay ETF and mutual fund expense ratios, as well as fund trades.
  • Basic match where employee matches 100 percent of the first 3 percent of deferred compensation and a 50 percent match on the next 2 percent.
  • Enhanced match is when the company matches or exceeds the basic option. Typically, the employer gives a 100 percent match on the first 4 percent of deferred compensation.
  • Nonelective where the company contributes 3% or more of an employee’s compensation whether or not the worker opts for elective deferrals. 
  • 2023 contribution limits: $22,500 for employees or $30,000 for employees age 50 and older. Employers can contribute up to 25% of the employee’s compensation, but the total contribution, including employee and employer contributions, must not exceed $66,000 or $73,500 for employees age 50 and older who make catch-up contributions.
  • Type of filing: As with the traditional 401(k), you’re required to submit IRS Form 5500 with this plan. Nondiscrimination testing isn’t required.
  • Ideal for small businesses whose owners and high-earning employees want to invest aggressively in their retirement accounts.

The safe harbor 401(k) is similar to a traditional 401(k), except that it requires employer matching programs and is not subject to an annual IRS nondiscrimination test.

Solo 401(k)

A solo 401(k) is a retirement savings plan designed for self-employed individuals who want to maximize their retirement contributions. It’s also referred to as an individual 401(k) or i401(k). Only the business owner and their spouse may participate in this type of plan; business owners with employees do not qualify for it:

  • Cost: Fees vary, depending on the plan provider. Some charge a setup fee and have monthly or annual administrative and advisory fees. Others don’t charge these fees but instead have ETF and mutual fund expense ratios and trading commissions. Some retirement plan providers require a minimum opening investment and charge service fees if your account balance doesn’t meet a certain threshold.
  • Contribution structure: You can contribute to this account as both the employee and employer. A Roth option for the employee contribution may be available, depending on the plan provider.
  • 2023 contribution limits: $22,500 for the employee contribution, plus a $7,500 catch-up contribution if you’re age 50 or over. The employer contribution limit is up to 25% of your compensation. However, the total defined contribution limit, which includes both employee and employer contributions, is $66,000 for 2023, not counting catch-up contributions.
  • Type of filing: If your plan has $250,000 or more in assets, you must submit IRS Form 5500-SF or 5500-EZ. Because you don’t have employees, nondiscrimination tests are not required.
  • Ideal for sole proprietors who wish to take full advantage of retirement savings opportunities.

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a small business retirement plan that is easy to set up and has low contribution and matching requirements for employers. It allows employees to contribute more than they could with traditional or Roth IRAs:

  • Cost per employee: There are usually no setup fees for this type of plan. Participating employees pay fund trades and expense ratios. Depending on the plan provider, there may be account service or maintenance fees.
  • Contribution structure: Employees have the option of contributing to their accounts through elective deferrals. There is no Roth option for this plan. Employers must either contribute 2% to all employee accounts or match 3% of employee contributions. Contributions are 100% vested. Self-employed people who choose this plan can contribute to it as both employee and employer.
  • 2023 contribution limit: $15,500 for employees; employees who are 50 and older can make an extra $3500 catch-up contribution. Employers aren’t allowed to exceed the 2% contribution or 3% match.
  • Type of filing: This plan doesn’t require employers to file IRS Form 5500 or submit to nondiscrimination testing.
  • Ideal for small businesses with 100 or fewer employees that want to keep their costs low and allow employee contributions.

A Simplified Employee Pension IRA (SEP IRA) is a retirement savings plan that’s inexpensive for employers to establish and easy to maintain. Employer contributions aren’t required annually, making it a good option for business owners who only want to contribute during high-profit years:

  • Cost per employee: There are usually no setup fees for this type of plan. Plan participants pay trading commissions and fund expense ratios. Depending on the plan provider, there may be account service or maintenance fees.
  • Contribution structure: Only employers may contribute to employee accounts. Contributions must be the same percentage of compensation for every participant. Employers aren’t required to contribute to accounts every year. Contributions are immediately 100% vested.
  • 2023 contribution limits: Up to $66,000 or 25% of compensation, whichever is less. There are no catch-up contributions allowed for this plan type.
  • Type of filing: The plan doesn’t require employers to file IRS Form 5500 or submit to nondiscrimination testing.
  • Ideal for businesses of all sizes that want a plan that is easy to set up and maintain and allows employers the flexibility of choosing which years they make contributions to employee accounts.

A SEP IRA is designed for employers who want to choose when they make contributions to the plan as annual contributions are not required. For example, it allows them to only make contributions only during high-profit years.

Traditional IRAs

IRAs are the simplest type of retirement accounts to set up. Furthermore, nearly everyone is eligible ― freelancers, business owners and even people who already have employer-sponsored retirement plans. This type of plan is a popular option for people who have 401(k) assets from previous jobs that they need to roll over into a new retirement account. There’s usually no cost to set up an IRA, but you will pay trading fees and fund expense ratios.

This type of retirement account allows you to make annual tax-deductible contributions, depending on your modified adjusted gross income and whether or not you have a workplace-sponsored account. Earnings on principal and interest accumulate on a tax-deferred basis:

  • 2023 contribution limit: $6,500. If you’re age 50 or older, you can contribute up to $7000.
  • Contribution rules: You can contribute to your account until age 70.5, at which time required minimum distributions (RMDs) apply. You can withdraw funds penalty-free at age 59.5. You must start taking distributions by April 1 of the year you turn 72. 
  • Ideal for individuals who anticipate that their tax rates will be lower during retirement years, as this account allows you to defer taxes until you withdraw your money.

This type of retirement account differs from traditional IRAs in that contributions aren’t deductible. Instead, you’ve already paid income taxes on the money you invest, allowing interest to grow tax-free. It also has no age limits on contributions and has different withdrawal rules:

  • 2023 contribution limits: $6,500. If you’re age 50 or older, you can make a $1,000 catch-up contribution.
  • Contribution rules: There’s no age limit on contributions so, unlike with traditional IRAs, you can continue contributing to your account past age 70.5. In addition to waiting until you’re age 59.5 to withdraw your funds, you must have established the account at least five years before you make withdrawals. However, there are no RMDs during your lifetime.
  • Ideal for individuals who expect higher tax rates during retirement years . Since Roth contributions have already been taxed, your money grows tax-free and there are no additional taxes to pay when you withdraw it.

As with all major financial decisions, consult your certified public accountant , tax advisor or financial advisor for retirement and investment advice specific to you and your business. The information in this article is general and shouldn’t be considered financial, legal or tax advice.

What are the best small business retirement plan options? 

Small businesses have a number of retirement plan options to consider. Here, we take a look at some of the best employee retirement plan options for small businesses.

USA 401k is a small, independent retirement benefits provider that offers services through a subsidiary of MassMutual. What sets them apart is their transparent pricing. ( See USA 401k review )

Paychex is an all-in-one human resources (HR) payroll and benefits solution that offers 401(k) and retirement services for businesses of all sizes. Small businesses can work with Paychex to build a customized plan based on their — and their employees’ needs. ( See Paychex Flex HR Software review )

ADP really stands out as the best employee retirement benefits provider for small businesses because of its comprehensive payroll, HR outsourcing and benefits services, which can all be integrated through the company’s SMARTSync Comprehensive Plan Automation. ( See ADP Employee Retirement review )

Human Interest

A dedicated employee retirement benefits provider that offers cost-effective and user-friendly services online. Employers can choose from three plans — Essentials, Complete and Concierge. ( See our Human Interest Employee Retirement review )

Fidelity Investments

Fidelity provides a wide array of services, including individual retirement accounts and employer-sponsored retirement plans. 

A relatively new company that has a particularly strong safe harbor 401(k) offering. 

One of the oldest and largest mutual fund companies in the world, Vanguard offers a wide range of mutual funds and ETFs for account holders to choose from. 

What are the retirement plan tax advantages for small businesses?

The government offers the Retirement Plans Startup Costs Tax Credit to help small businesses offer retirement plans to their employees. It allows you to deduct up to 50 percent or $500 of plan startup and administration costs for the first three years of your plan.

If you match or make contributions to employee accounts, that money is also tax deductible. It allows you to contribute to your own retirement savings plan and, like your employees, you have the option of elective deferrals that may allow you to lower your income tax bracket. Also, depending on your income, you may qualify for the Saver’s Credit .

Additional tax credits may soon be available as federal lawmakers seek to make retirement plans more accessible and affordable for small business owners. For example, one bill under consideration would provide a tax credit to small businesses that auto-enroll their workers in their retirement plans. [Related article: Retirement Savings Rules See Big Changes: What You Need to Know ]

Do small businesses have to offer employee retirement plans?

The short answer is no. No private businesses in the United States are required to offer retirement plans to their employees. Many companies offer retirement plans as part of benefits packages to help attract and retain talent. For smaller companies, offering retirement plans may help bring in new workers, but it also may be the right thing to do for your existing employees.

Depending on your situation, it’s important to consider how retirement plans will impact your business and its employees. Benefits like retirement plan options or healthcare can be a major tipping point for employees who are waffling between staying loyal to your company and taking their talents elsewhere. 

What type of employee retirement plan should I choose? 

If you have employees and want …

  • To set a vesting schedule that encourages employee retainment, check out a traditional 401(k) .
  • To avoid nondiscrimination testing, so you and your highly compensated employees can aggressively save for retirement, think about a safe harbor 401(k) .
  • A simple plan that allows your employees to make contributions, look into a SIMPLE IRA .
  • To choose which years you contribute to employee retirement accounts ― for example, if your business profits fluctuate from year to year ― consider a SEP IRA .

If you’re a sole proprietor and want …

  • To save as much money for retirement as allowed and contribute as both an employee and the employer, look into a solo 401(k) .
  • To save as much money for retirement as allowed, but only want to make employer contributions, check out a SEP IRA .
  • For a simple retirement plan that’s easy to set up, consider a traditional IRA .

For a simple after-tax plan that allows your money to grow tax-free, look into a Roth IRA .

Small businesses of all types have a wide selection of employee retirement plans, including traditional 401(k), SIMPLE IRA and solo 401(k) plans.

Offer a benefit that keeps on giving

Small businesses can earn big benefits from offering employees retirement plan options to ensure a comfortable retirement. With many plan options available, you’re sure to find one that meets your company’s ― and your employees’ needs. 

Linda Pophal contributed to this article.

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5 Types of Retirement Plans for Small Business Owners

5 Types of Retirement Plans for Small Business Owners

Retirement plans for small business owners are often overlooked. Small business owners spend most of their time consumed by building the best business possible, making customers happy, and taking care of their employees. So it’s important that they focus on their own retirement plan .

Let’s look at why retirement planning is important, and how to choose the right types of retirement plans for small business owners.

Why is retirement planning important for owners of small businesses?

As a small business owner, retirement planning is crucial to help ensure financial security and a comfortable retirement. As we said before, you have likely spent considerable time building your business and focused on the future of your team, but that often means that you haven’t thought much about the day when you finally step away from the business you built.

In our blog, we’ve mentioned that “Retirement planning is the process of intentionally working through the many factors to consider in order to retire comfortably. It involves calculating your expected retirement expenses and then figuring out how best to save for them. Still, it also involves soul searching and thinking of what kind of retirement you want to pursue.”

Here are some tips on how to get the most from retirement planning:

Start early

The earlier you start planning and saving for retirement, the more time your money has to grow. Even if you can only contribute a small amount each month, it can make a big difference over time.

Consider a retirement plan

There are several retirement plans available to small business owners, including a Simplified Employee Pension (SEP) plan, a Savings Incentive Match Plan for Employees (SIMPLE) IRA, and a 401(k) plan. These plans can offer tax advantages and help you save more for retirement. We’ll look more closely at these later.

Diversify investments

Invest your retirement savings in a diversified portfolio of assets to help manage risk and maximize returns. Consider seeking professional advice from a financial planner or advisor .

Review and adjust regularly

Regularly review your retirement plan and adjust your contributions and investments as necessary. As your business grows, your retirement needs may change.

Challenges for retirement planning for small business owners

Simply put, there are only so many hours in a day. Effective retirement planning takes time, effort, and experience.

As an example, the best retirement plans for small business owners with employees may not be the best retirement plans for small business owners without employees. If you don’t know which to choose, it may negatively impact your financial situation.

Another challenge is that many small business owners have variable income. Unlike those who draw a steady corporate salary, your business may have lean periods throughout the year. A retirement plan that’s flexible may allow you to contribute in big chunks over time, as opposed to a steady payroll deduction.

The good news is that a financial advisor can help with these challenges. They have the time to stay on top of your plan, the experience to execute it, and the knowledge to understand how to get you where you need to be to meet your goals. They can help, for example, put together a plan of expected profit so you can determine your contribution percentage, overcoming the variability in income.

Benefits of retirement planning for small businesses

a small business owner compares retirement plans

Retirement planning may have tax benefits. When you contribute to a retirement plan, most allow you to do so on a pretax basis. Much of the time, contributors are able to deduct portions of their contributions from federal and state taxes. There have been recent changes in laws that may allow you to get a tax credit simply for opening a retirement plan.

Bringing in a professional financial advisor can help you prevent leaving money on the table.

Types of retirement plans for small business owners

Forbes says “You have plenty of great options to save for retirement if you’re a small business owner. So, take a moment away from your daily tasks to look into your own retirement strategy.” Generally, we will work with small business owners to help them choose between these 5 types of retirement plans:

A 401(k) is a retirement savings plan that is offered by many employers in the United States. It is named after the section of the U.S. tax code that governs it. Under a 401(k) plan, employees can elect to have a portion of their pre-tax income automatically withheld and contributed to a retirement savings account. If you do not have any employees, you have the ability to set up a Solo 401(k), which operates the same way as a traditional 401(k).

A SEP IRA (Simplified Employee Pension Individual Retirement Arrangement) is a type of retirement savings plan that is designed for self-employed individuals and small business owners. A SEP IRA is “inexpensive for employers to establish and easy to maintain. Employer contributions aren’t required annually, making it a good option for business owners who only want to contribute during high-profit years.” All contributions are immediately vested so if you have high turnover amongst your employees, you’ll want to take that into consideration.

3. Simple IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is easy to set up and has a low contribution and matching requirements for employers. It allows employees to contribute more than they could with traditional or Roth IRAs.”

4. Traditional IRA

A traditional IRA (Individual Retirement Account) is a type of retirement savings account that allows individuals to save money for retirement on a tax-deferred basis.Contributions you make to a traditional IRA are in most cases fully deductible, but that may depend on your income and other factors.

5. Roth IRA

A Roth IRA is a special individual retirement account (IRA) in which you contribute to the account with after-tax money, and then all future withdrawals are tax-free if the account has been opened for over 5 years and you are older than 59 ½ .”

As you can see, there are a lot of choices for retirement plans for business owners. Making sure that you pick the best option for you and your goals may make all the difference in your retirement years. Fortunately, you don’t have to choose alone–and we recommend that you don’t.

Schedule a free assessment with Dechtman Wealth Management today.

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Jordan Dechtman

A financial services professional for over three decades, Jordan Dechtman’s mission is to help clients live better with more opportunities for fun and family time. Ideally, his goal is to help them achieve their dreams. Jordan brings a unique set of skills and experiences to the industry. His work ethic and drive to improve both himself and those around him have been honed during his 30+ years as a high net-worth private wealth advisor. Jordan holds a BS in Finance from the University of Arizona. Through his memberships in both the Financial Planning Association and the Financial Services Institute, he is dedicated to championing the financial planning process. Based on assets under management, Jordan has consistently been recognized by Securities America as being among the top 1% of over 1900 registered representatives.

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I'm a financial planner with entrepreneur clients, and I recommend one of 5 different plans based on their business

Our experts answer readers' investing questions and write unbiased product reviews ( here's how we assess investing products ). Paid non-client promotion: In some cases, we receive a commission from our partners . Our opinions are always our own.

  • There are several retirement plans good for small business owners — including self-employed workers.
  • Each type of account has certain pros and cons and offers different requirements and limitations.
  • These decisions shouldn't be made lightly; a financial planner can help you find your best option.

Insider Today

Starting and operating a small business is no small feat. At some point every entrepreneur will face some common challenges. One of the most common questions I receive from my business owner clients is how to save for retirement .

Luckily, there are several retirement plan options to choose from. However, choosing the right plan depends on many factors such as the size of your business, the number of employees you have, and your financial goals. Here are five retirement plan options I recommend to my business owner clients.

The SEP IRA is one of the easiest retirement plan options to set up for small business owners. A SEP IRA can be utilized by business owners with any number of employees. However, if you have employees, be aware that you have to contribute the same percentage to your employee's account as you do to your own.

In 2024, employers may contribute up to 25% of wages or $69,000, whichever is less. A SEP IRA is easy to set up and has low maintenance costs and allows for pre-tax or Roth contributions. Contributions are not required each year, and they can be made up to the tax filing deadline, including extensions. Additionally, they may be used in addition to a traditional IRA or Roth IRA .

However, no catch-up contributions are allowed. You have to contribute the same percentage of compensation to your employee accounts as you do to your own, and employee contributions aren't allowed. The SEP IRA doesn't allow for loans and withdrawals — you generally can't access your funds penalty-free until age 59½, except for some rare exceptions.

2. Solo 401(k)

A solo 401(k) is a great retirement plan option for business owners with no employees (besides a spouse, potentially). Many entrepreneurs enjoy this option because it is like an employer-sponsored 401(k) that they may have had at a previous job. A solo 401(k) can be used in addition to a traditional IRA or a Roth IRA.

This plan allows you to make contributions as both the employer and the employee. In 2024, employees can contribute up to $23,000, or $30,500 if you are 50 or older. As the employer, you can make an additional contribution of up to 25% of compensation. The combined contribution limit is $69,000, or $76,500 for those 50 or older.

Like SEP IRAs, solo 401(k)s allow pre-tax and Roth contributions, but they also allow for employee loans and hardship withdrawals. Both employee and employer contributions are allowed, and employer contributions can be made up to the tax filing deadline, including extensions — employee contributions, though, generally need to be made before the end of the year.

Additionally, a solo 401(k) is more costly and complicated to set up, and it cannot be used if you hire employees. You'll also be required to report it to the IRS once your account balance reaches $250,000. You also can't access your funds penalty-free until age 59½ unless you meet one of the exceptions.

3. SIMPLE IRA

The is another retirement plan option for small business owners that is easy to set up. This option is available to small business owners with no more than 100 employees. In 2024, employees may contribute up to $16,000, or $19,500 for those age 50 and older. Employers must contribute to all their employees' SIMPLE IRA via one of two options.

Like the SEP IRA and solo 401(k), the SIMPLE IRA allows pre-tax and Roth contributions, and it can be used in addition to a traditional IRA or a Roth IRA. It's easy to set up and has low maintenance costs. It requires employer contributions (up to the tax filing deadline) and allows employee contributions (within 30 days after the end of the tax year). Again, you can't usually access funds penalty-free until age 59½.

4. Traditional IRA

A traditional IRA is one of the many available IRA retirement accounts that offer tax savings. Any small-business owner can open and fund this type of account. In 2024, the contribution limit is $7,000 per year ($8,000 if age 50 or older).

Contributions to this account are either pre-tax or after-tax depending on if you (or your spouse) are covered by an employer's plan and your adjusted gross income. If you or your spouse are covered by an employer's plan, then your contribution may be partially or non-tax deductible based on your income for that tax year .

5. Roth IRA

A Roth IRA is a retirement account that offers tax-free withdrawals in retirement funded by after-tax contributions. A small-business owner can open and fund this type of account if they are below the income thresholds defined by the IRS . Many small business owners choose to fund a Roth IRA during years when their income is below the threshold. In 2024, the contribution limit is $7,000 a year ($8,000 if age 50 or older).

One of the biggest tax benefits of the Roth IRA is that you can avoid paying taxes on your earnings. In addition, money in a Roth IRA is accessible penalty- and tax-free if your account has been open for at least five years.

There are many other limitations and features of each plan to consider before deciding. Small business owners should not take this decision lightly. You should carefully consider your overall financial and business goals before selecting a plan. Consulting with a financial advisor or CPA can help you determine the best retirement plan for your specific needs.

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Watch: Mark Cuban explains why a 401(k) is a no-brainer

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How to Pick the Best Small Business 401(k) Plan Provider

Look at the options available and research thoroughly before choosing a retirement plan for employees.

The Best Small Business 401(k) Plan Providers

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Some 401(k) plan providers cater to smaller companies, such as a startup or those with fewer than 50 employees, while others are set up for medium-sized or large businesses.

To attract and keep talented employees, it can be a smart move to add a 401(k) plan to your small business. As a result of the SECURE Act , which was passed in 2019, there are now more opportunities for small employers to offer retirement plans. The law allows small businesses to participate in pooled employer plans, making it easier and less costly for small employers to provide workers with a retirement plan. Here's how to select the right 401(k) plan provider for your small business.

Find the Best 401(k) Providers for Small Business

Since there are many providers to choose from, keep in mind that not all will offer the same services or prices. Some 401(k) plan providers cater to smaller companies, such as a startup or those with fewer than 50 employees, while others are set up for medium-sized or large businesses.

These providers specialize in 401(k) plans for small businesses:

  • American Funds. Small businesses of any size, from startups to those that have recently merged, can find traditional and Roth options through this provider.
  • Betterment. Through its online cost calculator, small business owners can enter their number of employees and plan preferences to gain a personalized estimate of 401(k) costs.
  • Charles Schwab. Charles Schwab provides 401(k) plans for companies of any size and creates customized plans to fit a business’ specific needs.
  • Employee Fiduciary. With 401(k) plan establishment fees that start at $500, Employee Fiduciary provides personalized service from setup through plan administration.
  • Fidelity Investments. Fidelity has small business 401(k) plans available for businesses with more than 20 employees and an app that employees can use to monitor their accounts.

How to Set Up a 401(k) for a Small Business

To offer a 401(k) plan for employees, the IRS lays out four steps to get started. These include:

  • Adopt a written plan. If you have assistance from a professional or a financial institution, this step will usually be provided for you.
  • Arrange a trust for the assets. A plan’s assets need to be in a trust to make sure they are used only for the participants and their beneficiaries.
  • Develop a recordkeeping system. If you work with a financial institution, you can generally expect to have help with keeping the necessary records.
  • Communicate information to employees. This includes sharing details about the plan with workers who are eligible to participate.

You will also have to decide on the type of 401(k) plan to offer employees. This could be a traditional 401(k) plan, a safe harbor 401(k) plan or an automatic enrollment plan. With a traditional 401(k) plan, the employer can elect to make contributions for all plan participants or offer a 401(k) match , but is not required to contribute. A safe harbor 401(k) plan requires the employer to make annual contributions on behalf of employees. An automatic enrollment 401(k) plan permits the company to automatically sign employees up for the plan and place salary deductions in certain investments.

Consider Whether to Match Employee 401(k) Contributions

Many employees rely on a 401(k) plan to help fund their retirement. “In our experience, a company’s contribution to the plan has become a key recruitment and retention tool of high-performing leaders,” says Eric Shisler, vice president and director of research and retirement plan services at Budros, Ruhlin & Roe in Columbus, Ohio. You might offer a match which consists of a percentage of an employee’s contribution, up to a specified percentage of the employee’s salary. Or you could provide a match up to a certain dollar amount.

Another type of employer contribution is 401(k) profit sharing, which allows a business to set aside a portion of its pre-tax profits in employee retirement accounts. You may choose to contribute a certain dollar amount, or a percentage of each employee’s salary. Before committing to contributions, you’ll want to think about short- and long-term profit projections. “Another key consideration for business owners when setting up a plan is if the company can sustain their contribution if cash flow fluctuates,” Shisler says.

Look at Small Business 401(k) Costs

Providing 401(k) accounts to employees will come with fees , and you should carefully sort through the fine print before selecting a 401(k) plan. A small business 401(k) plan might charge recordkeeping fees, investment fees and transaction fees.

Keep in mind that fees might change if the company hires more workers. “Look to understand how the fees quoted may change as the plan grows,” Shisler says. “Plans with the cheapest pricing upfront are not always the cheapest plans over time, especially with well-funded plans.”

Consider the Small Business 401(k) Investment Options

Look for a 401(k) plan that provides an assortment of investment options , rather than just a few ways to invest. “One of the major things that you want to look for in a plan for small companies is what kind of lineup of investment options will be available to the employees,” says Mike Scarborough, president and CEO of Oak Wealth Partners in Lexington Park, Maryland. “It should be broad-based in the sense that it should have large and small stocks, various types of bonds, some international exposure that is very broad-based, as well as emerging markets."

Carefully Select a Small Business 401(k) Provider

You’ll typically want to involve experts in the financial industry to help oversee the 401(k) plan. "Many individuals in the financial services industry can sell you a plan, but usually there are certain advisors who specialize in working with 401(k)s," says Art Haws, CEO and managing partner and HawsGoodwin Wealth in Franklin, Tennessee. "They can help you navigate the many issues and decisions made when starting and maintaining a plan."

A trustee will manage the 401(k) plan assets, and carries the responsibility of making decisions according to the plan's terms. A 401(k) custodian does not make management decisions, but holds plan assets.

When researching options, ask about the third party administration setup. "Some plans bundle the TPA services like plan design and documents, testing and tax preparation, while others require you to work with an outside TPA," Haws says. "An experienced financial advisor can help explain the benefits of either, and recommend the best solution for your specific situation." Some financial professionals will help you communicate about the retirement plan to employees. Also ask about payroll integration, as a 401(k) provider with payroll-related services might make your 401(k) plan easier to manage.

How to Max Out Your 401(k) in 2021

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Retirement Plans for Small Business Owners: Choosing the Best Option

  • August 27, 2023
  • Entrepreneurship & Startups

types of retirement plans for small business owners

Looking for the best retirement plan for your small business? Wondering how to attract and retain talented employees? With so many options out there, it can be overwhelming. But don’t worry, we’ve got you covered.

In this article, we’ll guide you through the process of choosing the right retirement plan for your business. From evaluating benefits to understanding tax implications, we’ll provide all the information you need to make an informed decision.

So, let’s get started and find the perfect retirement plan that will set your business on the path to success.

Table of Contents

Key Takeaways

  • Choosing the best retirement plan for employees is important for small business owners.
  • Retirement plans provide benefits for both employers and employees.
  • Retirement plans help attract and retain talented employees.
  • Small business owners should consult with a financial advisor to determine the best plan for their business.

Types of Retirement Plans for Small Business Owners

Consider these four retirement plans for small business owners to determine the best option for your business.

When evaluating investment options and retirement plan administration, it’s crucial to have a comprehensive understanding of each plan’s features.

The first option is a Simplified Employee Pension (SEP) IRA, which allows for tax-deductible contributions and flexible contribution limits.

Another option is a Savings Incentive Match Plan for Employees (SIMPLE) IRA, which offers ease of administration and contribution flexibility.

A solo 401(k) plan is available for self-employed individuals and offers higher contribution limits and potential for loans.

Lastly, a defined benefit plan provides a guaranteed retirement benefit and allows for larger contributions.

Each plan has unique advantages and considerations, so consulting with a financial advisor is essential to make the best choice for your business.

Key Factors to Consider When Choosing a Retirement Plan

When deciding on a retirement plan, it’s important to evaluate factors such as contribution limits, tax advantages, and ease of administration. Evaluating investment options and retirement plan administration are key considerations in choosing the best retirement plan for small business owners. To help you make an informed decision, let’s take a look at a comparison table showcasing four popular retirement plans:

Evaluating the Benefits of Each Retirement Plan Option

To understand the benefits of each retirement plan option, you should evaluate the contribution limits, tax advantages, and ease of administration.

When evaluating the advantages of employer-sponsored retirement plans and comparing the costs of different retirement plan options, consider the following:

  • Contribution limits: Some plans have higher contribution limits, allowing you to save more for retirement.
  • Tax advantages: Look for plans that offer tax deductions for contributions or tax-free growth on investments.
  • Ease of administration: Consider the administrative requirements and fees associated with each plan.

By carefully evaluating these factors, you can choose a retirement plan that aligns with your financial goals and offers the greatest benefits for both you and your employees.

Remember to consult with a financial advisor to ensure you make an informed decision.

Understanding the Tax Implications of Retirement Plans

Understanding the tax implications of different retirement plan options can help you make informed decisions about saving for your future. When considering retirement plans, it is important to understand how taxes will impact your savings and withdrawals. To help you navigate this complex topic, let’s explore the tax implications of various retirement plan options.

Comparing Contribution Limits for Different Retirement Plans

Consider the contribution limits of various retirement plans to determine which option aligns with your savings goals. Evaluating investment options and comparing vesting schedules are crucial steps in making informed decisions about your retirement plan. Here are some key points to consider:

Traditional IRA: This plan allows individuals to contribute up to $6,000 per year, with an additional catch-up contribution of $1,000 for those aged 50 and older.

Roth IRA: With a Roth IRA, you can contribute up to $6,000 per year, or $7,000 if you are 50 or older. The main advantage is that qualified withdrawals are tax-free.

401(k): This employer-sponsored plan offers higher contribution limits, with a maximum of $19,500 per year, or $26,000 if you are 50 or older.

SEP IRA: Designed for self-employed individuals and small business owners, the SEP IRA allows contributions of up to 25% of your net self-employment income, with a maximum of $58,000.

SIMPLE IRA: This plan allows employees to contribute up to $13,500 per year, or $16,500 if you are 50 or older, while employers can make matching contributions.

Exploring the Eligibility Requirements for Retirement Plans

Explore if you meet the eligibility requirements for different retirement plans to determine the best option for your financial future.

When it comes to retirement planning, understanding the eligibility requirements is crucial. Income requirements and age restrictions are common factors that determine your eligibility for retirement plans.

For example, some plans may have income limits, while others may require you to reach a certain age before you can participate. It’s important to explore these requirements to ensure that you can take advantage of the retirement plan that suits your needs.

Additionally, understanding the different retirement plan options is essential. Comparing options like a 401(k) versus an IRA or a defined benefit plan versus a defined contribution plan allows you to make an informed decision.

How to Set Up a Retirement Plan for Your Small Business

Now that you have a clear understanding of the eligibility requirements for retirement plans, let’s delve into the process of setting up a retirement plan for your small business without the assistance of a financial advisor. While seeking professional advice is always recommended, there are benefits to exploring this option on your own.

When setting up a retirement plan for your small business without a financial advisor, consider the following:

  • Research different retirement plan options available to small business owners.
  • Understand the benefits of employer-sponsored retirement plans for both you and your employees.
  • Determine the contribution limits and eligibility requirements of each plan.
  • Familiarize yourself with the administrative responsibilities associated with managing a retirement plan.
  • Utilize online resources and tools to assist you in the setup and management of your retirement plan.

The Importance of Offering Retirement Benefits to Employees

Offering retirement benefits to your employees is crucial for attracting and retaining top talent. Not only does it show that you value your employees’ future, but it also provides them with financial security and peace of mind. Retirement plans have a significant impact on small business growth as well. By providing retirement benefits, you can increase employee loyalty and satisfaction, leading to higher productivity and lower turnover rates.

Here is a table highlighting the benefits of retirement plans for employee loyalty and the impact on small business growth:

Common Pitfalls to Avoid When Choosing a Retirement Plan

Avoid these common pitfalls when deciding on a retirement plan for your employees. Evaluating retirement plan fees is crucial to ensure that you’re getting the best value for your money. Common mistakes in retirement plan administration can lead to penalties and fines, so it’s important to stay informed and avoid these errors.

Here are five common pitfalls to avoid:

Ignoring hidden fees: Take the time to evaluate all the fees associated with the retirement plan. Look for any hidden costs that could eat into your employees’ savings.

Failing to benchmark fees: Compare the fees of different retirement plans to ensure you’re getting the most competitive rates. Don’t settle for the first plan you come across.

Neglecting investment options: Look for retirement plans that offer a wide range of investment options. This will allow your employees to diversify their portfolios and maximize their returns.

Lack of employee education: Don’t underestimate the importance of educating your employees about their retirement plans. Make sure they understand the benefits and how to make the most of their investments.

Inadequate plan administration: Be proactive in managing your retirement plan. Stay updated with regulatory changes and ensure compliance to avoid penalties and legal issues.

Maximizing Retirement Savings for Small Business Owners

Maximize your savings for retirement as a small business owner by exploring different strategies and investment opportunities. As a savvy entrepreneur, it’s crucial to implement effective retirement planning strategies to secure your financial future. By maximizing retirement savings, you can ensure a comfortable lifestyle post-retirement and enjoy the fruits of your hard work.

To achieve this, consider implementing retirement planning strategies that align with your business goals and risk tolerance. These may include setting up a Simplified Employee Pension (SEP) IRA or a Self-Employed 401(k) plan. These retirement plans offer tax advantages and higher contribution limits, allowing you to save more for retirement.

Additionally, consider diversifying your investments beyond traditional retirement accounts. Explore opportunities in stocks, bonds, real estate, or even venture capital. By diversifying your portfolio, you can potentially maximize your returns and build a substantial nest egg for retirement.

Remember, it’s essential to consult with a financial advisor who specializes in retirement planning for small business owners. They can provide expert guidance tailored to your unique circumstances and help you make informed decisions.

Tips for Managing Retirement Plans as a Small Business Owner

Now that you have learned about maximizing retirement savings for small business owners, let’s dive into some tips for managing retirement plans.

As a small business owner, it is crucial to make the most of your retirement savings and ensure a secure future. Here are some valuable tips to help you navigate the world of retirement plans:

Regularly review your retirement plan: Stay updated with any changes in regulations and assess if your current plan is still the best fit for your business.

Maximize contributions: Take advantage of contribution limits to maximize your retirement savings potential.

Offer matching contributions: Consider implementing a matching contribution program to incentivize your employees to save more for their retirement.

Seek professional advice: Consult with a financial advisor who specializes in retirement plans to ensure you make informed decisions.

Educate your employees: Provide resources and workshops to educate your employees on the importance of retirement planning and maximizing their savings.

The Role of a Financial Advisor in Choosing the Best Retirement Plan

Consider consulting with a financial advisor who can guide you in selecting the optimal retirement plan for your specific needs and goals. The role of a financial advisor in choosing the best retirement plan cannot be overstated.

With their expertise and knowledge, they can provide invaluable assistance in navigating the complex world of retirement planning. A financial advisor will take into account your unique circumstances, such as your age, risk tolerance, and desired retirement lifestyle, to recommend the most suitable plan for you.

They will also consider the benefits of professional guidance, which include maximizing tax advantages, ensuring compliance with regulations, and helping you make informed investment decisions.

Exploring Solo 401(k) Plans for Self-Employed Business Owners

To get the most out of your retirement savings as a self-employed business owner, you should explore the benefits of a Solo 401(k) plan. This retirement option offers flexibility and attractive contribution limits that can help you maximize your savings potential.

Here are some key features of a Solo 401(k) plan:

Higher Contribution Limits: With a Solo 401(k), you have the potential to contribute more towards your retirement compared to other self-employed retirement options.

Flexibility: You have the ability to make both employer and employee contributions, allowing for greater control over your retirement savings.

Tax Advantages: Contributions to a Solo 401(k) are tax-deductible, reducing your taxable income and potentially lowering your overall tax liability.

Investment Options: Solo 401(k) plans typically offer a wide range of investment options, giving you the opportunity to diversify and potentially grow your retirement funds.

Easy Administration: Setting up and managing a Solo 401(k) is relatively straightforward, with minimal administrative requirements.

As a self-employed business owner, exploring the benefits of a Solo 401(k) plan can provide you with a powerful retirement savings tool that aligns with your unique needs and goals.

Simplifying Retirement Planning With SEP Iras

If you’re a self-employed business owner, SEP IRAs can simplify your retirement planning process.

SEP IRAs, or Simplified Employee Pension Individual Retirement Accounts, offer tax advantages and are designed specifically for small business owners like you.

With a SEP IRA, you can contribute a percentage of your income, up to a certain limit, into a retirement savings account. This not only helps you save for your future, but also offers potential tax benefits.

Contributions made to a SEP IRA are tax-deductible, meaning you can lower your taxable income and potentially reduce your tax liability. Additionally, any earnings and investment growth within the SEP IRA are tax-deferred until withdrawal, allowing your retirement savings to potentially grow even more.

Pros and Cons of Establishing a SIMPLE IRA for Your Business

When establishing a SIMPLE IRA for your business, it’s important to weigh the pros and cons. Consider the advantages and disadvantages of a SIMPLE IRA for small businesses. Here are some key considerations for implementing a SIMPLE IRA in your business:

Easy setup and administration: The SIMPLE IRA is known for its simplicity and ease of administration, making it a popular choice for small businesses.

Tax advantages: Contributions to a SIMPLE IRA are tax-deductible, reducing your business’s taxable income.

Employee retention: Offering a retirement plan like a SIMPLE IRA can help attract and retain talented employees by providing them with a valuable benefit.

Limited contribution limits: The contribution limits for a SIMPLE IRA are lower compared to other retirement plans, which may not be suitable for businesses with high-earning employees.

Employer match requirement: With a SIMPLE IRA, employers are required to make either a matching contribution or a non-elective contribution, adding to the cost for the business.

Considering these factors will help you make an informed decision about whether a SIMPLE IRA is the right retirement plan for your small business.

Frequently Asked Questions

How do employee training costs impact employee buy-in.

Paying for employee training can positively impact their buy-in, leading to higher employee retention and a better training ROI. Consider innovative ways to engage and motivate employees to participate in training programs.

What Are Some Effective Ways to Encourage Employee Buy-In Without Asking Them to Pay for Training?

Encourage employee buy-in without asking them to pay for training. Motivate employees through incentives like bonus opportunities, recognition programs, and career development. Show the value of training by linking it to personal growth and advancement opportunities.

How Can Companies Engage and Motivate Employees to Participate in Training Programs?

To engage and motivate employees in training programs, create a culture of continuous learning. Offer incentives like career development opportunities, recognition for completing training, and a supportive environment that encourages growth.

How Can Individuals Navigate Awkward Money Conversations in the Workplace?

Navigating workplace conversations about money etiquette can be challenging. Establish clear boundaries and expectations for financial discussions. Communicate effectively and show empathy to navigate these awkward conversations with confidence and professionalism.

What Are Some Strategies for Establishing Clear Boundaries and Expectations Regarding Financial Discussions at Work?

To establish clear boundaries and manage expectations regarding financial discussions at work, start by openly communicating the company’s policies and guidelines. Encourage employees to respect each other’s privacy and avoid discussing sensitive financial matters unless necessary.

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  • EMPLOYEE BENEFITS

Help small businesses choose the right employee retirement plans

Cpas can help business owners make sense of the various options available..

Help small businesses choose the right employee retirement plans

  • Personal Financial Planning
  • Retirement Planning

Retirement plans offer significant tax advantages to small business owners and give them and their employees incentive to save for the future. Several types of retirement plans are available to small businesses, each with its own requirements and restrictions. The same plan is not necessarily ideal for companies of all sizes and ownership structures, so small business owners need to do their homework before making a decision.

As a CPA, you can help business owners select and implement the plan that is most appropriate for them. You can base your recommendations on the unique characteristics of your client's business, such as the owner's retirement goals, how the business is set up (as a sole proprietorship, a limited liability company, a C corporation, or an S corporation), the number of employees, and so on. You can also help them understand the legal and compliance issues related to each type of plan, as well as any tax advantages it might bring.

What follows is an overview of the types of plans, as well as a discussion of issues to consider as you assist small business - owner clients throughout the often - confusing process of choosing a retirement plan.

MAJOR TYPES OF RETIREMENT PLANS

Various types of retirement plans are available to small business owners. The major ones include the following (see the chart, "Comparison of Retirement Plans for Small Businesses," for more details on the four most common types of plans):

Simplified employee pension (SEP) plans

SEPs can be used by businesses with any number of employees. Contributions are made by the employer only (up to the lesser of 25% of each qualified employee's compensation or $55,000 for 2018) and are tax - deductible as a business expense. The primary advantage of SEP plans is how simple they are to administer. After adoption, no annual IRS forms generally need to be filed for a SEP, and administrative costs are minimal.

There are three steps to establishing a SEP. The employer must (1) execute a written agreement to provide benefits to all eligible employees; (2) give employees certain information about the agreement; and (3) set up an IRA account for each employee. The IRS has a model SEP plan document, Form 5305 - SEP , Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement . However, not all employers can use Form 5305 - SEP , and instead some must use a prototype document.

However, SEPs do not allow employees to defer income, and employees are always 100% vested in employer contributions to their SEPs. Therefore, they may not be the best choice for companies in industries with high employee turnover or that want to use a retirement plan to help retain employees. Another potential drawback to these plans is that they require the employer to make contributions at the same percentage to all eligible employees. Because of this requirement, a smaller company with a self - employed owner may lack sufficient cash flow to support such a plan if the owner wants to make a large contribution to his or her SEP.

Savings incentive match plan for employees (SIMPLE) IRA plans

SIMPLE IRAs are generally available to businesses with 100 or fewer employees who received $5,000 or more in compensation in the preceding year. These plans are funded by tax - deductible employer contributions and pretax employee contributions.

As the name implies, SIMPLE IRAs are simple to implement and administer. To implement this plan the employer can use Form 5304 - SIMPLE , Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) — Not for Use With a Designated Financial Institution , or Form 5305 - SIMPLE , Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) — for Use With a Designated Financial Institution . As with Form 5305 - SEP , the employer is required to keep the form in its records but does not file it with the IRS.

A small employer may wish to implement a SIMPLE IRA plan because it allows employees to defer income by making salary reduction contributions (subject to annual limitations) to their SIMPLE IRAs. Another potential advantage to an employer of a SIMPLE IRA plan over a SEP is that it generally requires a smaller contribution on the employer's part. An employer must match each employee's salary reduction contribution dollar - for - dollar up to 3% of the employee' compensation or make a nonelective contribution of 2% of an eligible employee's compensation (up to $275,000 for 2018), regardless of whether the employee makes a salary reduction contribution.

As with SEPs, though, employees are always 100% vested in employer contributions to SIMPLE IRAs, so they may not be the best choice for companies in industries with high turnover.

Qualified plans

Qualified plans are more complex than SEPs or SIMPLE IRAs and, therefore, have more stringent reporting requirements. But they can be more appropriate for larger or growing businesses. Larger businesses generally have the staff and infrastructure to accommodate the required reporting of a qualified plan and, typically, desire features such as loan provisions and in - service withdrawals allowed in qualified plans that are not allowed in a SEP or SIMPLE IRA. There are several types of qualified plans, which can be broken down into two broad categories: defined benefit and defined contribution plans.

Defined benefit plans. Commonly referred to as pension plans, defined benefit plans promise to pay employees a steady income stream at some point in the future. The amount each employee receives is most commonly based on earnings history and length of service. Employers must contribute enough to the defined benefit plan each year to satisfy what's known as a minimum funding requirement. Due to the complexity of the minimum funding calculation and other requirements, administration of a defined benefit plan usually requires professional assistance from an actuary. For that reason, very few small businesses use them.

Defined contribution plans. With defined contribution plans, employers contribute into individual accounts for each employee. Employees generally have the authority to invest the money as they see fit among the investment options provided by the plan. Defined contribution plans do not require immediate vesting of amounts contributed to the plan by employers and may allow employee loans.

Types of defined contribution plans include profit sharing plans and money purchase plans. Under a profit sharing plan, an employer's contributions are discretionary, so the employer is not required to make contributions to the plan each year. Under a money purchase plan, contributions are mandatory, so the employer must make a contribution to the plan each year, and the contribution percentage used to determine the contribution amount for each year cannot vary.

401( k ) PLANS

Profit sharing plans can include a 401(k) feature (also known as a cash or deferred arrangement, or CODA) under which the employees participating in the plan can choose to have a portion of their pretax compensation contributed to an individual account rather than receive the compensation in cash. These contributions are called "elective deferrals" because the employee elects to defer the receipt of the amount contributed to the account. A profit sharing plan with a 401(k) feature is popularly referred to as a "401(k) plan." A "solo 401(k) plan" is a 401(k) plan that covers only a business owner and his or her spouse.

For 2018, participants in a 401(k) plan can make elective deferrals of up to $18,500 ($24,500 for participants who are age 50 or over at the end of the calendar year). If the plan permits, employers can contribute a percentage of each employee's compensation to the employee's account (a nonelective contribution) or can, within certain limits, match the amount of employees' elective deferrals or do both. Total employer and employee contributions to a 401(k) plan are limited to the lesser of:

  • 100% of the employee's compensation, or
  • $55,000 (for 2018).

A 401(k) plan can be designed so that employees' ownership in employer matching or nonelective contributions becomes vested over time, subject to a vesting schedule. After the vesting period for a contribution is completed, the employee is 100% vested in the employer contributions and has a nonforfeitable right to the full amount of the contributions in his or her account. Providing for vesting of employer contributions to a retirement plan may help an employer retain valued employees.

Under a graded vesting schedule, an employee vests in employer contributions incrementally over a period of years. Many plans use a five - year vesting schedule, with the employee vesting in 20% of employer contributions per year of service, with the employee being 100% vested in the contributions at the beginning of year 6. For example, an employer's plan document includes a five - year vesting schedule for employer matching and nonelective contributions to employees' accounts as a plan provision. The employer makes matching employer contributions to an employee's retirement account in the amount of $10,000 in year 1. Should the employee decide to leave the company during his second year of service, he or she would be entitled to retain $2,000, or 20%, of the employer contributions.

Alternatively, some plans provide for "cliff vesting." With cliff vesting, the employee vests in all employer contributions subject to vesting after the employee meets a specific minimum number of years of service. This vesting method reduces the amount of employer contributions retained by employees in higher - turnover industries.

A 401(k) plan is more complicated for businesses to implement and administer than a SEP or SIMPLE IRA. Though, in recent years, they have become less complex and less expensive for smaller businesses, they will generally require the expertise of a third - party administrator (TPA) to maintain compliance with all funding requirements and testing of the plan. This type of plan requires an annual return to be filed with the IRS (Form 5500, Annual Return/Report of Employee Benefit Plan ) and strict compliance with regulations. Excise taxes and penalties could become substantial if the plan is not administered correctly.

Solo 401(k) or solo Roth 401(k) plans

If an owner and his or her spouse are the business's only employees, they may qualify for a solo 401(k) plan. These plans are typically offered and administered by mutual fund and insurance companies. They allow the same benefits as the plans offered by much larger companies but usually have low administrative costs.

One advantage of a solo 401(k) is that it allows self - employed individuals to obtain tremendous benefits through income deferral. Additional tax savings can be achieved if the company matches 25% of the employee's compensation. For example, an owner/employee, age 51, operates an S corporation and received a Form W - 2 , Wage and Tax Statement , with $50,000 of wages. The employee deferred the maximum allowed employee contribution of $24,500 in 2018. His business contributes 25% of his gross wages, or $12,500, on his behalf. The total amount of contributions would be $37,000, which is the maximum amount allowed.

Comparison of retirement plans for small businesses

retirement-plan-comparison

PROMPT CLIENTS TO THINK ABOUT THEIR REASONS FOR CHOOSING A RETIREMENT PLAN

To choose the right retirement plan, business owners need to weigh a variety of factors, one of the most crucial being their goals for the plan. Therefore, the first step in helping clients choose a plan is often to determine the "why" behind it: Do they desire to provide incentives to their employees? Are they seeking superstar employees and wish to compete with other companies that offer a variety of benefits? Or do business owners desire greater tax incentives and an opportunity to grow their wealth?

Your clients' answers to the "why" question can help guide their choice of plan. For example, if they want to create a sense of ownership among employees, they might consider a plan that allows profit sharing. This type of plan fosters a proprietary approach by the employees to the overall success of the company and can motivate employees to participate in the company's production and profitability.

Business owners who are interested in promoting employee retention, on the other hand, may want to select a plan that allows for the segregation of employees for funding purposes — for instance, a plan that provides greater corporate contributions for more senior employees who serve in leadership roles.

CPAs should also encourage clients to think about what their employees want and need. Too often business owners simply adopt a plan and offer it to the workforce without a true understanding as to the needs and desires of their employees. By performing a simple survey of the employees they wish to retain and/or reward, business owners may find commonalities that can help them narrow down the attributes to look for in a plan.

FACTORS TO CONSIDER WHEN SELECTING A PLAN

It is also vital for the CPA to evaluate all known factors that would impact the operation, funding, and reporting requirements of a retirement plan. Some of the most important factors include:

  • Affordability. The plan must be affordable for the company to administer and fund.
  • Who can contribute. The employee, employer, or both.
  • The number of employees and their eligibility to participate.
  • Employee turnover and vesting period. An important criterion for choosing a retirement plan is employee turnover in the business. Should the business experience a good deal of employee turnover, the company should give special consideration to the plan's vesting period.
  • Contribution limits. The minimum and maximum contribution limits for employers and employees need to be considered.
  • Administrative requirements. Another factor to discuss is how difficult the plan will be to administer. As they often have limited administrative personnel, small business owners usually seek plans and benefits that place less of a compliance burden on their human resources or payroll specialists. Many companies may select a SIMPLE IRA rather than a 401(k) because it takes less time to administer.
  • Need for a TPA. An important aspect to consider when selecting a plan is whether it will require a third - party administrator — which means that the business owner will incur an additional cost. A 401(k) plan or defined benefit plan requires TPAs that provide valuable compliance services. These more sophisticated plans must meet certain IRS regulations to maintain their favored tax status. Should a plan fail to meet the required regulations, the plan may be subject to excise taxes and penalties.
  • Operational aspects. How can contributions be made, assets managed, and information be provided to participating employees?
  • Withdrawal limits and timing. How and when can assets be accessed? What are the penalties for early withdrawal? Are there exceptions to these rules?

FINAL CONSIDERATIONS

Equipped with knowledge on myriad personal financial and tax topics, CPAs can be valuable advisers to small business owners in setting their retirement goals. They can play a vital role in assisting these clients in choosing a retirement plan that fits their personal goals as well as their business requirements.

About the author

Jimmy J. Williams ( [email protected] ) is CEO, president, and wealth manager at Compass Capital Management in Tulsa, Okla.

To comment on this article or to suggest an idea for another article, contact Courtney Vien, senior editor, at [email protected] or 919-402-4125.

AICPA resources

  • " Case Study: Advantages of a One-Person 401(k) Plan ," The Tax Adviser , Nov. 2017

Publication

  • The CPA's Guide to Financial and Estate Planning, Vol. 2 , chapter 9

CPE self-study

  • Governmental and Employer Retirement Plans (#166420, online access)

For more information or to make a purchase, go to aicpastore.com or call the Institute at 888-777-7077.

PFP Member Section and PFS credential

Membership in the Personal Financial Planning (PFP) Section provides access to specialized resources in the area of personal financial planning, including complimentary access to Broadridge Advisor. Visit the PFP Center at aicpa.org/PFP . Members with a specialization in personal financial planning may be interested in applying for the Personal Financial Specialist (PFS) credential. Information about the PFS credential is available at aicpa.org/PFS .

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BartleyFinancial

6 Common Types of Small Business Retirement Plans

by Robert Bartley | Oct 5, 2020 | Financial Planning , Retirement | 0 comments

man on phone at desk

First, I want to be clear that these small business retirement plans are available to all types of business structures, whether you have a sole-proprietorship, S or C Corporation, LLC taxed as a corporation or partnership, or a partnership. However, just because these plans are available to all businesses doesn’t mean they’re right for yours. To determine which option is best for your business, you’ll need to identify your goals and determine your cash flow.

There are 6 major types of small business retirement plans: Payroll Deduction IRA, SEP IRA, SIMPLE IRA, 401(k), Safe Harbor 401(k) and Defined Benefit Plan. Similar to the old fashioned “baker’s dozen” that provided a bonus 13th donut, in the small business retirement account world, there is a bonus of two other types of small company retirement plans: the Profit Sharing Plan and Automatic Enrollment 401(k). However, these last two “bonus” plans are often used as features in a Traditional or Safe Harbor 401(k), not as stand alone plans.

The types of small business retirement plans vary from the simple, employee-only Payroll Deduction IRAwith no employer contributions, to the most complex, employer-sponsored Defined Benefit Plans.

Continue reading for an introductory exploration of small business retirement plans and to learn more about which plan might be right for your company.

Bartley Financial free Profit Sharing eBook

IRA Based Plans

An IRA, or Individual Retirement Account, is one of the simplest retirement plans available to small businesses. These plans can include minimal employer involvement or employer contributions, depending on the business owner’s preference.

Payroll Deduction IRA

Under this plan, employees set up a Traditional or Roth IRA. The employee then informs the employer the payroll deduction amount that they want to contribute to their IRA. The employer then transfers the employee’s IRA payroll deduction to their IRA account.

Like with other IRAs, contributions are not subject to taxes until the time of withdrawal.

For most small businesses with employees, a SEP (Simplified Employee Pension) does not make sense. It can be very costly where all contributions are made by the employer. In addition it does not promote or educate employees on saving for their retirement.

However, SEP IRAs can be a good fit for self-employed individuals with no employees. Annual contributions can vary in amount from year to year, allowing business owners to adapt to leaner times and take advantage of profitable years. Plus, contribution limits are very high, amounting to $57,000 or 25% of earnings (whichever is lower).

SIMPLE (Savings Incentive Match Plan for Employees) IRAs are available to businesses with fewer than 100 employees. A SIMPLE IRA plan works like a 401(k) plan and offers many of the same benefits as traditional retirement plans, but with lower administrative costs. If you don’t have a lot of excess cash flow, this plan can be a good starting point.

However, this plan, like any other plan, has its pros and cons. Although SIMPLE IRAs are easier and less costly to administer, employee contribution limits are lower than with a 401(k) (generally $6,000/year less if under age 50 and $9,000/year less if over age 50). Additionally, employers sacrifice flexibility with the employer contribution or match (either 2% of all eligible employees’ compensation or a 3% matching contribution).

Small businesses who have some cash flow flexibility tend to start with a Safe Harbor 401(k) or they graduate to it from a SIMPLE IRA plan. The Safe Harbor 401(k) allows for simplified discrimination testing if the employer contributes 3% of all employees compensation or a 4% matching contribution.

Defined Contribution Plans

Under a Defined Contribution Plan, employees make tax-deferred contributions to capital market investments with or without additional employer contributions. The most common types of defined contribution plans are 401(k)s.

401(k) plans give employees the option to have a portion of their earnings redirected by their employer to an individual retirement account. These elective deferrals are usually exempt from federal income tax at the time of contribution. Instead, employees pay taxes when they begin to withdraw funds after retirement age. The exception is when employees flag some of their deferrals as “Roth elective deferrals.” These deferrals follow the same taxation rules as Roth IRAs and are taxed as income during the contribution year.

Employer contributions to 401(k) are tax deductible when they are within 401(k) contribution limits .

Traditional 401(k)

With a Traditional 401(k), an employer can match contributions to employee elective deferrals or contribute on behalf of every employee, regardless of whether that employee has contributed. All contributions must meet nondiscrimination criteria and employers must pass annual tests, proving that contributions do not inappropriately benefit highly compensated individuals.

Safe Harbor 401(k)

Safe Harbor 401(k) plans offer many of the same features as a Traditional 401(k), with the primary difference that employer contributions must be fully vested. Furthermore, Safe Harbor plans are not assessed with complex annual non-discrimination tests. Even still, without a profit sharing feature, employers cannot allocate more money to highly compensated employees.

Automatic Enrollment and Profit Sharing

Automatic enrollment and profit sharing are features that can be added to a 401(k) to tailor the plan you select to the specific needs or desires of your business.

The profit sharing retirement plan feature enables 401(k)s to function similarly to Defined Benefit plans. Using this feature, employers can more heavily weigh their contributions to highly compensated and longest tenured employees. However, they can do so at a much lower cost than a Defined Benefit Plan. Plus, employer contributions are discretionary, so small business owners can adjust their annual contributions according to cash flow.

To learn more about profit sharing plans, download our eBook Profit Sharing: The Small Business 401(k) Tax Saving Secret .

The automatic enrollment feature enables business owners to automatically redirect a fixed amount or percentage of employees’ wages to a 401(k) plan. Employees must take action to opt out of this arrangement. Some businesses choose to add this feature to encourage their employees to save for retirement.

Defined Benefit Plans

The most complex small business retirement plan is the defined benefit plan. This plan allows for the highest contributions to employees. It is funded by the employer. It is by far the most expensive plan based on level of contributions and cost to administer. It works like a pension plan – the older you are and closer to retirement, the larger the employer contribution. These plans work best for small businesses with no employees beyond the principal owner or a very small number of employees, especially if they are much younger than the owner and years from retirement.

Which small business retirement plan is right for your business?

Choosing the right small business retirement plan comes down to your goals and cash flow.

Working with a fee-only, fiduciary financial planner like Bartley Financial can mean the difference between choosing a small business retirement plan that saves your company money and retains top talent, and choosing a plan that swamps your business in expenses and administrative headaches.

Reach out to us today to find out more about how we can help you choose, implement, and maintain a retirement plan for your small business.

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Small business retirement plans made simple

Help your employees prepare for the future with a solution that fits your business., are your employees saving enough for retirement.

Making ends meet and saving for retirement at the same time can be a challenge for today’s employees. Many don’t have a plan or haven’t saved even a fraction of what they would need to retire comfortably. We aim to fix that.

As a business owner, you can help start your employees on a path to a better future. A Simply Retirement by Principal ® 401(k) plan is an easy way for them to save money now with the potential to have it grow over the years so they can enjoy retirement.

Why choose us?

What Simply Retirement by Principal ® can do for you

Setting up a workplace retirement plan isn’t something you do every day. We get it. Maybe you aren’t even sure where to start. Simply Retirement by Principal ® makes it easy to learn more about retirement plans and what’s involved. And when you’re ready, you can use our planner to see what a plan might look like for your business and estimate costs.

Take advantage of SECURE 2.0 Act tax credits to help offset up to 100% of (up to $5,000 per tax year for the first three years for some employers) your first three years of plan startup costs. The benefits of the SECURE 2.0 Act.

Simple selections

Set up your plan 100% online, where and when it’s convenient for you—or call if you have questions. We’ve streamlined the investment selection and simplified the paperwork, too.

Simple pricing

The low, flat-fee recordkeeping pricing makes a 401(k) plan affordable for small businesses. It’s a straightforward cost you can plan for each month.

Simple onboarding

After you purchase your plan, you’ll enroll your employees through the Ubiquity Retirement + Savings ® platform—used by thousands of small businesses across the U.S.

Simple administration

Ubiquity’s user-friendly dashboard will help you manage your plan and save time with features like automated notifications and payroll integration.

Take advantage of SECURE 2.0 Act tax credits to help offset your first three years of plan startup costs. * The benefits of the SECURE 2.0 Act.

Simply Retirement by Principal ® costs

One-time setup fee for bundled plans.

Every month

Recordkeeping fee will be billed to business owners quarterly ($435 plus per-participant fees). Pricing shown applies when working with a third party administrator (TPA). With bundled pricing, the recordkeeping fee is $185 per month ($555 billed quarterly) plus per-participant fees. Custodial fees, investment fees, and financial professional and TPA fees (if applicable) are additional.

Cost savings with flat-fee 401(k) plan pricing

Other 401(k) plans may increase recordkeeping fees to business owners as the total account balances increase. not with the simply retirement by principal ® 401(k) plan. no guessing and no changes as your employees contribute. it’s a predictable model you can plan for..

What would a plan for my company look like?

Backed by experience

Simply Retirement by Principal ® combines more than 75 years of retirement expertise from Principal ® * with the digital technology and services of Ubiquity Retirement + Savings ® . We’ve come together to help make retirement plans a reality for more small businesses.

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Ready to explore a 401(k) plan for your business?

Here are the next steps we can take together:.

Answer a few questions to see if this solution fits your needs.

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Complete your plan purchase and get your login.

Enroll employees and start saving.

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Still have questions? We have answers.

What are the tax benefits for starting a new 401(k) plan?

A new enhancement was made to the tax credits intended to help cover the costs for small employers that choose to offer new defined contribution plans. Small employers with 50 or fewer employees can now count 100% (maximum $5,000 a year) of their qualified plan expenses toward the tax credit calculation, allowing more employers the ability to maximize the  tax credit.

What is a 401(k) plan, and how does it compare?

401(k) plans allow employees to set aside a portion of their pay, typically before taxes. Employers can make contributions to the employees’ retirement plan if they choose.

What’s involved in managing a 401(k) plan?

The program automates many of the tasks required, but you’ll still have a few basic responsibilities as the plan administrator. Here’s what you need to know.

Intended for plan sponsor use.

Start-up tax credit modification: Small employers with 50 or fewer employees may apply 100% of qualified start-up costs towards the tax credit formula (up to $5,000 per year).

  • Applicable to small employers with 50 or fewer employees.
  • For employees with 51-100 employees: The credit is phased out by reducing the amount of credit each year 2% for each employee in excess of 50.

1st and 2nd year = 100%, 3rd year = 75%, 4th year = 50%, 5th year = 25%, 6th year = 0%

No contributions may be counted for employees with wages in excess of $100,000 (inflation adjusted). If taking advantage of this tax credit, employer contributions may not also be counted towards “start-up costs” in the start-up tax credit calculation.

*Recordkeeping-fee: Pricing shown applies when working with a TPA. Bundled pricing is a $500 initial setup fee, then $185 per month. Fees paid by the business owner are billed quarterly. Fees paid by participants are deducted monthly from participant accounts. Participant fees are charged if there is a $100 account balance, regardless of whether the participant is active or inactive. Custodial and investment fees are charged against participating employees’ accounts (those vary by investment and range from 0.03% - 0.86%, as of December 31, 2023). If the business owner chooses to work with a financial professional and/or TPA, their fees are also additional and may be billed to the business owner. Financial professional fees may be deducted from participant accounts.

*What’s included: Plan costs are billed quarterly. Custodial and investment fees are charged against participating employees’ accounts (those vary by investment and range from 0.03% to 0.86%, as of December 31, 2023). If the business owner chooses to work with a financial professional and/or TPA, their fees are separate and may be billed to the business owner. Financial professional fees may be deducted from participant accounts.

*Principal: As of December 31, 2023

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What Is a SIMPLE 401(k) Plan?

  • How It Works
  • Rules and Regulations
  • Advantages and Disadvantages

The Bottom Line

  • Retirement Planning

SIMPLE 401(k) Plan: What It Is, How It Works, FAQ

Small business owners should know about this retirement-plan option

types of retirement plans for small business owners

A SIMPLE 401(k) is a retirement savings account offered by small business employers with 100 or fewer employees. The SIMPLE 401(k) works just like a regular 401(k) plan , combining it with the simplicity of a SIMPLE IRA with a few minor changes. Employees can defer some of their wages to the plan and employers must either make a matching or non-elective contribution of a certain amount of each employee's wages.

Employers who are eligible to set up these plans must meet certain eligibility requirements and the Internal Revenue Service (IRS) sets limits on how much can be contributed each year.

Key Takeaways

  • SIMPLE 401(k) plans are retirement savings plans offered by small business employers or companies with 100 or fewer employees.
  • This kind of plan combines the features of traditional 401(k)s with the simplicity of SIMPLE IRAs.
  • Participants must be at least 21 and have one year of service before they can participate.
  • Contributions to the plan are fully vested immediately and employees are allowed to borrow against their account balances.
  • Employees who provide SIMPLE 401(k)s can't offer their employees any other options and contribution limits are lower than traditional 401(k) plans.

How SIMPLE 401(k) Plans Works

As the name implies, the SIMPLE 401(k) is a simplified, stripped-down version of a regular 401(k) plan that is geared toward self-employed individuals and small business owners. And just like SIMPLE IRA accounts, only employers with a staff of 100 or fewer can establish SIMPLE 401(k) plans. Establishing businesses can be structured in any form, including sole proprietors, corporations, and partnerships.

SIMPLE 401(k)s work just like regular 401(k)s. Employees contribute with pre-tax dollars out of their paychecks, investing the funds in options provided by the plan administrator . The IRS limits annual contribution amounts, which are about two-thirds of those allowed for regular 401(k)s. Employees can contribute a maximum of $15,500 in 2023 and $16,000 in 2024. People 50 and over are allowed to deposit an additional catch-up contribution of $3,500 in 2023 and 2024.

All employer contributions to a SIMPLE 401(k) are subject to an employee compensation cap, which is $330,000 for 2023 and $345,000 for 2024. This is one way the  SIMPLE 401(k) differs from a SIMPLE IRA . Unlike traditional 401(k)s, employers are required to make either a matching contribution to their employees' accounts—up to 3% of each employee's pay or a  nonelective contribution of 2% of each eligible employee's pay.

Companies that offer their employees a SIMPLE 401(k) plan must file Form 5500 every year.

SIMPLE 401(k) Rules and Regulations

Employees who are at least 21 years old and completed at least one year of service must be allowed to participate in their employers' SIMPLE 401(k) plans. They must also receive at least $5,000 in SIMPLE compensation from their employers for the preceding year in order to take part.

Funds in a SIMPLE 401(k) must be held in the account until the employee reaches age 59½. Withdrawals made before that point are subject to an early withdrawal penalty of 10%.

The employer must provide a deferral notice to each eligible employee for the year the plan is established and for each year the employer continues to maintain the plan. This notification must be provided at least 60 days before the employee becomes eligible to participate. It must include a statement of the employee's right to make salary deferral contributions and to terminate their participation in the plan.

The "SIMPLE" in a SIMPLE 401(k) plan is short for Savings Incentive Match Plan for Employees of Small Employers.

Advantages and Disadvantages of SIMPLE 401(k)s

There are a number of different benefits to participating in a SIMPLE 401(k) plan. But there are also several drawbacks. We've noted some of the major ones below.

Contributions to a SIMPLE 401(k) are immediately 100% vested . An employee who meets the requirements to receive distributions from the plan may withdraw their entire account balance whenever they like and won't lose it if they switch jobs after the money is in their account.

One of the simplified features is that SIMPLE 401(k) plans do not require nondiscrimination and top-heavy testing to ensure that the plan operates in compliance with IRS rules. Such testing must generally be done by professionals and can be quite costly.

Although withdrawals before the age of 59½ are subject to a penalty, employees can take out loans against their SIMPLE 401(k) balances. They also have the option of making hardship withdrawals from their plans if they need to do so.

Disadvantages

Unlike other retirement options, employer contributions are mandatory for those who offer SIMPLE 401(k) plans to their employees. As noted above, employers have one of two options available. They can contribute either 3% of each employee's pay or they can make nonelective contributions of 2% of each eligible worker's salary.

IRS rules prohibit a company from offering other types of retirement plans to employees already covered by a SIMPLE 401(k). That said, these companies may choose to maintain a separate retirement plan for other employees not covered by the SIMPLE 401(k).

Contribution caps to SIMPLE 401(k)s are smaller than those for traditional 401(k) plans. As noted earlier, employees can only contribute $15,500 in 2023 to a SIMPLE 401(k) plan with catch-up contributions of $3,500 per year for those 50 and older. Though these amounts increased to $16,000 of contributions with the same catch-up of $3,500 in 2024, these amounts are still lower than other retirement plans. For example, taxpayers can set aside $22,500 to their 401(k)s in 2023 and $23,000 in 2024. Catch-up contributions for these plans are $7,500 in both 2023 and 2024.

Immediate 100% vesting for employees

No discrimination testing for employer

Loans and hardship withdrawals allowed

Mandatory contributions (for employer)

No other plans allowed

Smaller employee contributions than regular 401(k)

Lower employee contribution limits

Who Is Eligible for a SIMPLE 401(k)?

A SIMPLE 401(k) is available for small businesses that have 100 or fewer employees who earn more than $5,000 per year.

What Is the Difference Between a SIMPLE 401(k) and a SIMPLE IRA?

Both SIMPLE IRA and SIMPLE 401(k) plans are options for small business owners to provide retirement benefits to themselves and their employees. The key differences are that SIMPLE 401(k)s allow for loans while SIMPLE IRAs do not, and a SIMPLE 401(k) requires employees to be 21 years or older while SIMPLE IRAs have no age restrictions.

How Much Can You Contribute to a SIMPLE 401(k)?

A SIMPLE 401(k) limits employees to $15,500 in contributions for 2023 and $16,000 in 2024. This is in contrast to a traditional 401(k), which has a $22,500 limit in 2023 and a $23,000 limit in 2024. Individuals may also qualify to make catch-up contributions for both plans.

Can I Have a SIMPLE 401k and a Traditional IRA?

Yes, you can maintain and contribute to an individual retirement account (IRA) while also having and contributing to an employer-sponsored SIMPLE 401(k) plan.

Helping your employees save for retirement is a great way to keep turnover rates down and retention up. It doesn't hurt in attracting talent, either—keeping a small firm competitive with the perks offered by larger corporations.

While SIMPLE 401(k) plans have a lot of benefits, such as easy-to-manage rules, they do have some disadvantages when compared with other savings plans. The mandatory contributions and the paperwork, simplified though it is, can be a burden.

As a result, they're not for every company but then, few options are. Consult with 401(k) plan providers and your team of tax professionals to see if this retirement vehicle is the best suited for you and your staff .

Internal Revenue Service. " Choosing a Retirement Plan: SIMPLE 401(k) Plan ."

Internal Revenue Service. " 401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000 ."

Internal Revenue Service. " 2024 Limitations Adjusted as Provided in Section 415(d), etc.; Notice 2023-75 ." Page 1.

Internal Revenue Service. " 401(k) Plans for Small Businesses ." Page 4.

Internal Revenue Service. " 401(k) Plan Overview ."

Internal Revenue Service. " Publication 560, Retirement Plans for Small Business ." Pages 14, 17.

Internal Revenue Service. " SIMPLE IRA Plan ."

Internal Revenue Service. " Choosing a Retirement Solution for Your Small Business ." Page 4.

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types of retirement plans for small business owners

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5 Types of Retirement Plans for Small Business Owners

5 Types of Retirement Plans for Small Business Owners

Small business owners are different from the average hourly employee in a lot of ways. One often-overlooked difference is how they plan for retirement. Although small business owners may offer a classic 401(k) for their workers along with other benefits such as insurance and other perks, such a plan may not be the right option for the owner of the company. Instead, you may want to consider a few of these other retirement planning tools.

There are three overarching categories of plans that aim to meet both owner and employee needs, and they all use investing in stock as a means to grow funds over time. Then, there are a few options under each of these umbrellas. Understanding the limitations and benefits of each option can help with business planning and overall small business strategy, including tax planning. [1] You can use the tips and information below to help you decide which option is appropriate for you and your company.

IRA-Based Plans

IRA stands for “Individual Retirement Arrangement.” It is perhaps the easiest form of retirement planning, so many small business owners who are also employers prefer to use this type of retirement plan. Although many people assume that they need to establish IRAs on their own, employers can use these plans for themselves and their employees as well.

You should keep some additional financial considerations in mind, however. Specifically, even as a business owner, the most you can contribute to an IRA is still $6,000 in 2019 and 2020. [2]

  • Traditional Payroll Deduction IRA

Employers can arrange to deduct a portion of their employees’ income and deposit those funds into an IRA. Employees decide how much they want to contribute, if anything, and the employer simply facilitates the contribution.

A SEP IRA is another type of IRA. SEP stands for “Simplified Employee Pension.” It allows employers to contribute to an IRA in an easy-to-use way, but employees cannot contribute to this plan. Contributions can be made to either an Individual Retirement Account or Annuity.

The limitations to add to the IRA are much higher than the average IRA because you are contributing as an employer rather than an employee. However, you must contribute equally to all plans, which may not be ideal if you have employees.

  • SIMPLE IRA Plan

The SIMPLE IRA is the only IRA plan that allows both employees and employers to contribute to an IRA. However, it can only be used by employers that have less than 100 employees and do not also maintain another type of retirement plan. One of the benefits of this type of retirement plan is that a bank or financial institution will handle most of the paperwork for you in many cases.

This plan will allow you to establish an IRA for yourself in addition to any employees that you may have.

Defined Contribution Plans

A defined contribution plan differs only slightly from an IRA. [3] However, these plans are more commonly used by larger employers that have many employees. The contribution is most often a combination of an employee’s percentage-based contribution and an employer match contribution. The 401(k) is by far the most widely used retirement plan for businesses, but it may not be the best option for small businesses.

  • Solo 401(k)

Even if you do not have any employees as a business owner or entrepreneur, you can still establish a solo 401(k). The limits for contribution are significantly higher on these plans than a traditional IRA. They work just like they would if you were your own employee.

  • Traditional 401(k)s

Other 401(k)s are for those with employees, but they will only work for a small business owner if he or she is also getting a salary like an employee as well. There are also special plans for those who function as solo LLCs or similar entities as well.

If you would like some additional tips and guidance to choose the right retirement plan for you and your business, LPL Financial can help. Call today for more information or to set up an appointment.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

[1] https://www.irs.gov/pub/irs-pdf/p3998.pdf

[2] https://www.nerdwallet.com/blog/investing/retirement-plans-self-employed/

[3] https://www.investopedia.com/terms/d/definedcontributionplan.asp

LPL Tracking #1-919989 (exp. 12/21) 

https://www.investopedia.com/terms/d/definedcontributionplan.asp

https://www.nerdwallet.com/blog/investing/retirement-plans-self-employed/ https://www.irs.gov/pub/irs-pdf/p3998.pdf

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The best retirement plans of 2024

Maryalene LaPonsie

Hannah Alberstadt

Hannah Alberstadt

“Verified by an expert” means that this article has been thoroughly reviewed and evaluated for accuracy.

Updated 6:02 p.m. UTC Feb. 13, 2024

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American workers have no shortage of options for selecting the best retirement plan.

  • Most people are eligible for more than one retirement plan.
  • 2024 retirement plans generally offer tax advantages. 

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Retirement is the end goal for most workers, but you can’t quit your job unless you have a source of income. While Social Security will pay for some expenses, the government says these benefits will cover only about 40% of your pre-retirement income.

In the past, many companies offered pensions that provided lifetime income to loyal employees. Now, pensions have all but disappeared, and most workers need to rely on their savings to fill gaps in their budgets.

Fortunately, several retirement plans are available, many of which offer attractive tax incentives or generous employer matches.

Best retirement plans of 2024

“You’re talking about an embarrassment of riches,” says Andrew Meadows, senior vice president of HR, brand and culture for Ubiquity Retirement + Savings, a 401(k) provider.

Plans exist for employees, self-employed individuals and small-business owners. Options within each category allow people to receive immediate tax deductions or set aside money for tax-free withdrawals in the future. The best retirement plans also offer various investment options with low fees. 

Employer-sponsored retirement plans

Employer-sponsored retirement plans are some of the best-known options, and if you are an employee — meaning you receive a W-2 at tax time — you likely have access to one of them.

These accounts can be a convenient way to save for retirement since payroll deductions fund them. Plus, many employers match a portion of employee contributions.

“You want to be sure you put enough in to qualify for whatever your employer is matching,” says Stuart Chamberlin, founder and owner of advisory firm Chamberlin Financial in Boca Raton, Florida.

Traditional 401(k)

Traditional 401(k)s are the most common retirement plans private companies offer employees.

Employee contributions to a traditional 401(k) are tax-deductible. You can access the money without penalty once you reach age 59½, and withdrawals are taxed as regular income. You must start taking required minimum distributions at age 73, meaning you cannot avoid taxes forever.

You can contribute up to $23,000 to a 401(k) plan in 2024. Savers age 50 or older can contribute an additional $7,500.

Roth 401(k)

A Roth 401(k) works like a traditional 401(k), except the tax benefits are different.

Because Roth accounts are funded with after-tax dollars, employee contributions are not tax-deductible. The benefit is that the money grows tax-free and can be withdrawn tax-free in retirement. If you make a withdrawal before age 59½ and before you have held the account for five years, some of it may be subject to income tax and a penalty.

Roth 401(k) contribution limits are the same as traditional 401(k) contribution limits.

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A 403(b) , also known as a tax-sheltered annuity, works like a 401(k) and may be offered in traditional and Roth versions. Typically, 403(b) plans are available to employees of public schools and certain tax-exempt organizations.

One unique provision of 403(b) plans is that workers with at least 15 years of service can make additional catch-up contributions, which may be worth up to $3,000. 

457(b) 

Employees of state and local governments and certain tax-exempt nongovernmental entities may be able to contribute to 457(b) plans. These accounts work like 401(k)s and can be found in traditional and Roth varieties.

Like 403(b)s, 457(b)s have a unique catch-up feature. Workers may be able to contribute up to twice the annual employee limit during the last three years before their normal retirement age. 

Thrift savings plan

The thrift savings plan is a retirement plan for federal government employees and uniformed members of the armed forces. It is comparable to a 401(k) account, with similar provisions and contribution limits. 

Individual retirement plans

Individual retirement arrangements, or IRAs, “have the lowest barrier to entry,” Meadows says.

You generally can open an IRA as long as you have earned income, even if you have a 401(k) plan or another workplace retirement account. But note that income limits may apply to deducting traditional IRA contributions and contributing to Roth IRAs.

Traditional IRA

Like a traditional 401(k), a traditional IRA offers an immediate tax deduction on contributions. Withdrawals after age 59½ are subject to regular income tax. Early withdrawals are subject to income tax and a 10% penalty. Required minimum distributions must begin at age 73.

You can contribute up to $7,000 to IRAs in 2024. Savers age 50 or older may make an additional $1,000 in catch-up contributions.

Your contributions may not be tax-deductible if you or your spouse is covered by a retirement plan at work and you exceed certain income limits. For 2024, the ability to deduct contributions begins to phase out at modified adjusted gross incomes above $77,000 for single filers and $123,000 for married couples filing jointly.

Roth IRAs don’t offer tax deductions on contributions, but withdrawals in retirement are generally tax-free. Further, because you’ve already paid taxes on your Roth IRA contributions, you can withdraw them anytime tax- and penalty-free. Early withdrawals of your earnings may be subject to income tax and a 10% penalty. 

Roth IRAs share the same contribution limits as traditional IRAs, but high earners are excluded from funding these plans. For 2024, the ability to contribute to a Roth IRA begins to phase out at MAGIs of $146,000 for single filers and $230,000 for married couples filing jointly. At incomes of $161,000 and $240,000, respectively, the opportunity to contribute to a Roth IRA is eliminated.  

Spousal IRA

A spousal IRA refers to the ability of a working spouse to open an IRA on behalf of a nonworking spouse. In this way, stay-at-home parents or other spouses without earned income can have their own IRAs with which to save for retirement.

Spousal IRAs can be traditional or Roth accounts and are subject to the same contribution and income limits as other IRAs. To open a spousal IRA, a couple must file their tax return jointly.

Rollover IRA 

A rollover IRA is a way to move money from one retirement account to another. For example, if you leave a job, you can roll over money from your 401(k) to an IRA rather than leave it in place.

You can opt for a direct rollover or an indirect rollover. With a direct rollover, the funds are transferred from the 401(k) administrator to the IRA administrator. With an indirect rollover, you receive a distribution from the 401(k) and then deposit the funds into the IRA. If you fail to deposit the full amount into the IRA within 60 days, it may be subject to both income taxes and a 10% penalty.

There is no limit on how much you can roll over. Note that rolling over into an account with a different tax treatment — from a traditional to a Roth, for instance — counts as a conversion and has tax implications.

Retirement plans for small-business owners and the self-employed 

One drawback of IRAs compared to employer-sponsored retirement plans is the low annual contribution limit. But if you are self-employed or a small-business owner, you have other options with higher limits. Becoming eligible for these plans may be easier than you think.

“If you have a side hustle and self-employment income, you absolutely have the ability to start your own retirement plan,” says Nathan Boxx, director of retirement plan services for financial advisory firm Fort Pitt Capital Group in Pittsburgh.

Whether you work for yourself or have a team of employees, the following accounts could be good options. 

Any self-employed individual or employer can open a SEP IRA , and workers can contribute the lesser of 25% of their annual compensation or $69,000 per year. That puts a SEP IRA in line with a 401(k) plan in terms of contributions. But you can’t make catch-up contributions to a SEP account.

There is no Roth SEP IRA option, so your contributions will be tax-deductible. Withdrawals in retirement will be subject to regular income tax, and you’ll also need to start taking RMDs at age 73.

If you like the idea of having some tax-free money available in retirement, there is no reason you can’t also open a Roth IRA. The IRS allows self-employed workers and business owners to contribute to both.

The SIMPLE IRA is what Boxx calls the “quick and dirty” option for small-business retirement plans. It is available to businesses with fewer than 100 workers and has few filing requirements.

“The trade-off is lack of flexibility,” Boxx says. You may not have the same plan or investment options that other accounts offer. SIMPLE IRAs also have lower contribution limits than 401(k)s.

In 2024, a worker can contribute up to $16,000 to a SIMPLE IRA. Savers age 50 or older can make $3,500 in catch-up contributions. All contributions are tax-deductible, and withdrawals in retirement are taxed as regular income. RMDs must be taken starting at age 73. 

Payroll deduction IRA

Payroll deduction IRAs can be traditional or Roth and have the same contribution limits as those accounts. The main difference is they are funded through payroll deductions.

These accounts can be an attractive option for small-business owners who would like to help their workers save for retirement but don’t want the expense that comes with creating a 401(k) plan. 

Solo 401(k) 

Also known as one-participant 401(k)s, solo 401(k)s allow business owners with no employees or self-employed individuals to open an employer-sponsored plan for themselves and their spouses.

The reporting rules make these accounts more complex than some of the other options. On the other hand, they have significantly higher contribution limits.

As an employee, you can make elective deferrals of up to $23,000 in 2024. Savers age 50 or older can contribute an additional $7,500. In addition, as an employer, you can make a profit-sharing contribution of up to 25% of your compensation from the business. Combined, the maximum solo 401(k) contribution is $69,000 in 2024. 

Solo 401(k)s may be opened as traditional or Roth accounts.

Why is having a retirement plan important?

Most people understand the value of having money set aside for retirement, but it may not be obvious why you should use a retirement plan. After all, you could invest the money in a regular brokerage account , put it in certificates of deposit or leave it in your savings account.

A retirement plan makes more sense for several reasons:

  • Retirement plans offer tax incentives — either deductions for contributions or tax-free withdrawals in retirement.
  • Your employer may match a portion of your contributions. That’s essentially free money to boost your savings.
  • Retirement plans are subject to certain standards and protections by law.

“Retirement money is sheltered from creditors up to a certain threshold,” Boxx says. That is one example of the type of protection your money gets when deposited in a retirement plan.

How to start investing in your retirement

The earlier you begin saving, the more likely you are to be financially secure in retirement. It isn’t hard to open a retirement account either.

If you work somewhere that offers employer-sponsored retirement accounts, contact your human resources office to start making contributions. Most plans let you choose from several investment options, and many now have target-date funds, which make it simple to invest based on your expected retirement date.

IRAs and other plans can be opened online or in person at many banks and brokerage firms. For instance, Ubiquity Retirement + Savings offers solo 401(k) plans, while Chase, Charles Schwab and Fidelity all have IRAs.   

How to choose the best retirement plan for you

If you have an employer-sponsored plan with a match, start there. You want to contribute enough to that plan to get the full match. After that, you can consider other options.

Here are some questions to ask yourself:

  • Do I do any contract work that would make me eligible for a small-business retirement plan?
  • How much do I expect to be able to contribute each year?
  • Do I want a tax deduction now, or would I rather have tax-free money in retirement?

Before you jump into any account, be sure to read the fine print. “What fees are you paying?” Meadows asks. Those fees include the expense ratios for specific investments and the costs to administer the plan.

An accountant or financial advisor can help you weigh your options and select the best retirement plan for your needs. 

Frequently asked questions (FAQs)

That depends on your unique circumstances. While Fidelity Investments suggests you save 10 times your income by age 67, you may need more or less to retire comfortably.

When determining how much money you’ll need, consider the following:

  • Whether you will have debt payments in retirement.
  • The cost of living in your area.
  • Your expected lifestyle.
  • How you will fill your time.
  • Your expected lifespan.

Each account has its pros and cons. IRAs typically offer more investment options, but they may come with more fees. With a 401(k) account, you can contribute significantly more, and your plan administrator is a fiduciary, meaning they are required to work in your best interest. Talk to a trusted financial advisor to decide which is right for you. 

Yes. “The IRS always gets theirs at the end,” Chamberlin says.

The difference is when you pay those taxes. Roth accounts are taxed upfront since you fund them with after-tax dollars. With a traditional account, the money isn’t taxed until you make withdrawals in retirement. If you die with money in a traditional account, your heirs will pay the taxes on the remaining amount.

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

Blueprint has an advertiser disclosure policy . The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.

Maryalene LaPonsie

Maryalene LaPonsie has been writing professionally for nearly 25 years and specializes in personal finance, retirement, investing and education topics. In addition to USA TODAY Blueprint, her work has been featured on Forbes Advisor, U.S. News & World Report, Money Talks News, MSN and elsewhere on the web.

Hannah Alberstadt is the deputy editor of investing and retirement at USA TODAY Blueprint. She was most recently a copy editor at The Hill and previously worked in the online legal and financial content spaces, including at Student Loan Hero and LendingTree. She holds bachelor's and master's degrees in English literature, as well as a J.D. Hannah devotes most of her free time to cat rescue.

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A Guide to Different Types of Retirement Plans for Small Businesse Owners

A Guide to Different Types of Retirement Plans for Small Businesses​

  • Retirement for Business Owners

Retirement is a common occurrence for individuals looking to leave the workforce at the end of their careers. The standard retirement age in the United States is over the age of 65. By this point in an individual’s career, one should be able to retire through various savings and investment strategies that have gained them enough money to comfortably live without the need to work. Many countries also have national pension or benefits systems in place to supplement a retiree’s income to help assist them with their savings. In the U.S, this system is called Social Security.

However, the path to get to financial freedom may be different for individuals who have ownership of their own small businesses. These small businesses have different rules when it comes to taxes and the employee benefits they are able to provide to an individual. This means that common employer-sponsored retirement plans, like a 401k , may not be possible for these small business owners.

Understanding Aspects of Retirement

Developing an exit strategy.

Understanding the way retirement works for small business owners and how it may vary from the path employed individuals may take is important when planning for one’s retirement.

Small business owners do qualify for Social Security benefits as the Social Security Administration treats self-employment income the same as they do with employee wages or salary. Regardless of employment status, in order to retire with partial Social Security Benefits, individuals commonly wait till the age of 62. However, in order to receive full benefits, individuals must wait till the age of 67 before considering retiring from the workforce. The benefits that Social Security provides vary based on income and other individualized factors. These benefits should be explored to their fullest potential when planning for retirement, as Social Security is an important aspect of one’s retirement strategy. Social Security often becomes one of the only sources of active income after retirement from one’s small business besides any additional income the sale of the business and its assets could make.

When saving for retirement, it is also essential to determine the time horizon you and your partner may have. This will not only determine how much longer you or your partner may live, but it will also establish when to sell the business. Because small business owners have more flexibility in exactly when they can retire, they can adjust their time horizon for retirement based on how much revenue their small business is providing and when and if an exit opportunity for the sale of their business materializes. Ensuring that you and your partner do not run out of money in your lifetime is crucial, so proper retirement planning is essential for a good quality post-retirement life. On average, individuals may live 15 to 20 years after turning 65. With proper health, exercise, and dieting, that number can increase by another 10 years, so ensuring that enough money is invested or saved up in order to have savings to fall back on is essential.

types of retirement plans for small business owners

Helping you achieve your evolving financial objectives

Types of retirement plans for business owners.

It is the responsibility of the small business owner to set up their own retirement plan, as employer-sponsored plans, like 401ks, may not be available to take advantage of. Small business owners may also often be responsible for helping and assisting their employees with retirement strategies in order to provide them with the opportunity to have a successful retirement. Due to the small size of the business, retirement plans and strategies that work for owners can also be applied to the benefit of the employee.

Besides the liquidation of the business, there are other types of traditional retirement plan options to fund one’s retirement. These options include both IRAs and 401ks and are excellent sources to add to one’s retirement income.

The SIMPLE IRA, or the savings incentive match plan for employees, is a retirement plan specifically designed and available for small businesses. It is a tax-deferred retirement account established by employers of a small business, including self-employed individuals. This retirement account is specially designed for small business employers who do not offer any other type of retirement plan and also have fewer than 100 employees working for the business.

In 2022, individuals are able to defer up to $14,000 of their salary to the plan. This number is planned to rise to $15,500 in 2023. Employees who are older than 50 can defer up to $17,000, allowing the difference of $3,000 to be classified as their catch-up contribution. This catch-up contribution will rise to $3,500 in 2023, adding up to a total of $19,000 for employees over 50.

It is also important to note that employees who participate in other offered employer-sponsored plans cannot contribute more than $20,500 in 2022, with plans to raise that number to $22,500 in 2023. These salary-deferred contributions are also supplemented by employer non-elective contributions. Just like a traditional 401k, employers are able to match these employer contributions up to 3% of the employee’s compensation. Employers are only allowed to contribute 2% of each eligible employee’s compensation up to $305,00 in 2022 and $330,000 in 2023. Employers are required to make minimum contributions to the employee’s account.

These employer contributions are tax-deductible, which can provide certain tax advantages and incentives to small business owners. SIMPLE IRAs are easier to establish and have lower administrative costs than other retirement plans

Another type of individual retirement account often seen with small businesses is a simplified employee pension (SEP) account. This is an account that lets small business owners and their employees both contribute. Like a SIMPLE plan, a SEP allows small business owners to make contributions on the behalf of the eligible employee. These contributions are tax-deductible, and employees won’t pay taxes on the amount employers contribute until they retire.

In 2022, employees could contribute up to 25% of their yearly income, or $61,000. In 2023 this number will rise to $66,000. However, to qualify for a SEP account, an employee must have earned at least $650 in 2022 or $750 in 2023.

This contribution limit is much higher than a standard IRA or a SIMPLE IRA, allowing employees to pocket more money into their retirement accounts. This account is easy to set up and has very low administrative costs. Practically any small business can establish a SEP. The number of employees or the structure of the business does not matter. Each year the business owner can decide how much to contribute on the behalf of their employees. There is no obligation to contribute if the business has a year of poor performance, and each employer can decide how much they want to contribute every year. Owners of the business are also considered to be employees of their business and can also make contributions to their own accounts. This option is preferable for small business owners as it allows for larger contributions and greater flexibility.

This retirement account option is also extremely beneficial for employees as well. Not only do employer contributions vest immediately, but employees can also manage their own investment decisions within the limits of the retirement plan.

Solo 401ks and regular IRAs are both common options for retirement for small business owners. Anyone, regardless of profession or business standing, can invest in an individual retirement account. Business owners are not obligated to but have the option to help their employees with their yearly contributions into their investment accounts. This account does not involve the business owners directly, but indirect contributions are always an option for the business owner to contribute to their employee’s retirement. The 2022 maximum yearly contribution for an IRA is $6,500 and $7,000 if older than 50.

If your small business does not have any employees, that is, the small business owners are the eligible participants for a retirement plan, then a solo 401k may be of interest for your retirement strategy. This can be a viable plan for sole proprietors to save for retirement.

Owners can contribute to this plan as individualized employees and also as business employers since they qualify as both employees and employers. Employee salary deferred contributions of up to 100% of one’s compensation can be possible, but the amount cannot pass the annual limit for the year. In 2022 this limit is listed at $20,500, while the limit will be raised to $22,500 for 2023. If over the age of 50, $6,500 is added to the limit for 2022, and $7,500 will be added for 2023.

However, in total, the business may contribute up to 25% of owner compensation and only 20% in the case of a sole proprietor. This means that the employer contribution limit is listed at $61,000 for 2022 and $66,000 for 2023. Just like for employee contributions, an additional $6,500 is added if one is over the age of 50 in 2022 and $7,500 in 2023.

Developing an exit strategy for your business as an owner may end up being a crucial part of your retirement strategy. The small business that has taken years to build may be the largest asset in an owner’s portfolio. Exiting or selling the business may allow an individual to not only stop working but also allows for the liquidation of the asset in order to add extra income for one’s retirement. In order for this to happen, the business needs to be able to run on its own without your assistance.

It is never too early to start thinking about a potential exit strategy. Finding an appropriate buyer would be the ideal first step. Market conditions may affect your ability to sell the business, but if the market conditions are in good standing, the chances to sell the business increase drastically. Preparing years in advance is also important to be able to determine a proper time to sell. Selling earlier than intended may be an acceptable outcome, as waiting till the last moment to exit may create the impression of a distressed sale among potential buyers. This will give buyers potential leverage to purchase your business at a discount rather than a premium.

  • Internal Revenue Service. “401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500.” Accessible From: https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500
  • Internal Revenue Service. “Retirement Topics – SIMPLE IRA Contribution Limits.”. Accessible From: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-simple-ira-contribution-limits
  • Internal Revenue Service. “SIMPLE IRA Plan.”. Accessible From: https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan
  • Internal Revenue Service.gov. “SEP Plan FAQs.”. Accessible From: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps
  • Internal Revenue Service. “About Publication 560, Retirement Plans for Small Business(SEP, SIMPLE and Qualified Plans).”. Accessible From: https://www.irs.gov/forms-pubs/about-publication-560
  • Internal Revenue Service. “Retirement Topics – IRA Contribution Limits.”. Accessible From: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  • Internal Revenue Service. “One-Participant 401(k) Plans.”. Accessible From: https://www.irs.gov/retirement-plans/one-participant-401k-plans
  • Internal Revenue Service. “Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits.”. Accessible From: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
  • Internal Revenue Service. “Retirement Plans FAQs Regarding Loans.”. Accessible From: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans
  • Internal Revenue Service. “Retirement Plans for Self-Employed People.”. Accessible From: https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people
  • Internal Revenue Service. “2022 Limitations Adjusted as Provided in Section 415(d), etc.”. Accessible From: https://www.irs.gov/pub/irs-drop/n-21-61.pdf
  • Internal Revenue Service. “Publication 560 (2020), Retirement Plans for Small Business.”. Accessible From: https://www.irs.gov/publications/p560
  • Internal Revenue Service. “401(k) Plans – Deferrals and matching when compensation exceeds the annual limit.”. Accessible From: https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit

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New Research Finds no Single Reason Will Lead Small Businesses to Offer Retirement Plans Other Than More Profits

A new research report published today from the Employee Benefit Research Institute (EBRI) Center for Retirement Research at Boston College and Greenwald Research found that other than more profits, no single reason will lead more small businesses to offer retirement plans. 

Also, many small businesses were found to not have experience working with an outside organization for payroll or administering other benefits, which can lower the ability or comfort in looking into what needs to be done to offer a retirement plan.

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Key findings in the research report include:

• Forty-seven percent of the small business owners who were offering a plan and 22% of those not offering a plan said they were aware of states launching programs requiring employers without a retirement plan to automatically enroll their employees in an IRA. Among the small business owners offering a plan, only 21% said they would stop offering their plan if this policy was adopted in their state, while 68% said they would continue to offer their plan.

• Among the small business owners not offering a plan, almost three-quarters (72%) said they were not aware of tax credits up to $5,000 being available to cover the costs of starting a retirement plan. However, 78% said the tax credits would make it at least somewhat more attractive to offer a plan.

• Over 9 in 10 of the small businesses offering a plan say that the reason that they offer a plan is the positive effect on employee attitude and performance. In addition, 90% say that a competitive advantage for the business in employee recruitment and retention is a reason for offering a plan. In fact, 30% say the positive effect of offering a plan is the most important reason, while another 25% say the competitive advantage is the most important reason.

• Of the small businesses not offering a plan, reasons regarding the costs of administering a plan and the profitability of the business were those most likely to be considered reasons for not offering a plan. Just over a quarter (26%) of businesses said their business is too new or too small as the most important reason cited for not offering a plan. 

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Numerous other factors ranked just below too new or too small as being most important, showing that no one reason will clearly be the most effective in increasing offer rates.

“The most important factor leading small businesses to consider offering a plan was an increase in the business’s profits. There were other reasons that were cited less, such as government mandates, lower administrative requirements, tax credits, and demand from employees," explained Craig Copeland, director, Wealth Benefits Research, EBRI. "So, there isn’t a specific reason or type of reason that stands out as leading more small businesses to consider offering a plan.” 

The 2023 Small Business Retirement Survey was produced in collaboration with the Center for Retirement Research at Boston College and Greenwald Research. The survey was conducted between February and April of 2023 and surveyed 703 small businesses (100 or fewer workers) with 323 offering a plan and 380 not offering a plan. The questions focused on why businesses do or do not offer a retirement plan.

“Without some direct interaction with small business owners, it will be hard to greatly increase the percentage of small businesses offering retirement plans, particularly among those that are the smallest. The rules and options for offering retirement plans are not well understood, and many of the business owners are experts in something other than benefits and do not have the revenues to have a benefits specialist on staff," Copeland said. "Thus, increasing offer rates among small businesses is going to require creative methods to reach them with the necessary information and infrastructure for the administration of retirement plans."

To view a summary of the research report, “Small Business Retirement Survey: Policy Knowledge and Reasons for Offering or Not Offering a Retirement Plan,” visit the link attached  here .

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