We all understand that we need to save money in a tax-sheltered retirement account to provide for our living expenses after we stop receiving paychecks. But where do you turn when you are a small business owner and do not have the readily accessible plug and play option of an employer provided 401k plan?

Small business owners, especially in the early years, have a lot to juggle and think about. Payroll, managing growth, managing employees and hiring, cash flow… It’s a lot to contend with, and sometimes retirement savings fall to the back burner.

Your focus is to ensure the long-term success of your business, which can often be to the detriment of your retirement savings. Lucky for you, the options and flexibility of small business retirement plans can be a bonus of being a business owner.

The best retirement savings option for you will be determined by whether or not you have employees, what type of employees, the amount you are able to save, and what both you and your employees would value. Let’s explore your options…

5 Retirement Savings Options for Small Business Owners

#1: Roth or Traditional IRA

A Roth or Traditional IRA account would be the most simple but also has a much smaller maximum contribution limit. ($6,500 in 2023 plus an additional $1,000 catch-up option if you are over age 50).

With a low administration cost, this is a great option for those with no employees or who haven’t grown to the point of being able to save a higher amount. But if your employees value a retirement savings option through work, you may face issues with talent retention.

#2: Solo 401k

This option only works for a person who runs a business with no employees and who is able to and desires to contribute a higher amount toward retirement savings. If you have the net income, a solo 401k is a great way to save a large amount of tax-sheltered money for retirement in a simple way.

Other benefits include:

  • You can contribute the maximum 401k amount as an employee ($22,500 for 2023 plus an additional $7,500 catch-up option if you are over age 50).
  • The business can contribute up to 25% of your compensation up to a maximum of $66,000 total employee plus employer contributions ($73,500 if you are over age 50).
  • If your spouse works in the business, they can also contribute to an account in the same way.
  • You can have a Roth option.
  • Low cost and easy to administer.

#3: SEP IRA

Affordable, easy to set up and maintain, the SEP IRA is ideal for the self-employed and those with less than three employees. The decision depends on how much the owner wants to save. Only the business can contribute money to the account, and you must contribute the same rate for each employee.

The business can contribute up to 25% of an employee’s income with a maximum of $66,000 in 2023. You can skip the contributions, so if your business has a down year, you aren’t required to make contributions.

#4: SIMPLE IRA

More complex than a SEP IRA but still relatively low cost and easy to administer, a SIMPLE plan can sometimes be thought of as 401k “lite.” There are options for employee and employer contributions but at a lower threshold than an actual 401k.

Employees can contribute up to $15,500 a year in 2023 (or $19,000 if over age 50). Employers must provide either a matching contribution or a nonelective contribution for all employees.

#5: Traditional 401k Plan

A more complex option with annual compliance testing and tax filing requirements, a 401k offers more options for flexibility and plan design if you have employees.

While several years ago it would likely have been unreachable for a small business to start a traditional 401k plan, new efficiencies and legislation have made it a much more viable option.

The cost barriers to entry for a startup 401k plan are lowering with online bundled platforms and tax incentives put in place through the SECURE Act that was passed in 2019. Businesses can get a pretty decent tax credit for start up costs and can also deduct plan costs from business income.

Employees can contribute the maximum 401k amount as an employee ($22,500 for 2023 plus an additional $7,500 catch-up option if you are over age 50).

There likely will be a mandatory safe-harbor match for employees. Businesses can also elect to make profit sharing contributions to increase the amount owners and employees have contributed to their account.

Don’t Leave Retirement Planning Too Late

As you can see, there are several great options for retirement savings vehicles in a small business. As a business owner, you will need to decide how much you can and would like to save, what level of fees and complexity can you support, what your employees value, and what options you would like to give to employees to help retain them, especially in this age of the Great Resignation.

There are of course more complexities to each option than is mentioned here. If you are a small business owner and would like to explore these options, please reach out. As a female financial planner and business owner, I am here to help guide you to a secure financial future. Get in touch to discuss how Abeona Wealth can help.

Mary Meadows Livingston, CFA, CFP®, Owner Abeona Wealth.
Investment advisory services offered through Navigate Wealth Management LLC, an Investment Adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Navigate Wealth Management also markets investment advisory services under the name Abeona Wealth. Information herein is intended for discussion and consideration and may make a number of simplifying assumptions. Securities investing involves risks, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful. Consult a financial, legal, or tax advisor for specific recommendations for a personal situation prior to implementation.

Pin It on Pinterest