If you’re a small business owner, you have to wear so many hats in the operation of your business, sometimes things like setting up a retirement account get put on the back burner.  A lot of small business owners think it’s complicated to set up a retirement plan for their business, but it’s actually not that hard at all.  The biggest challenge is finding out which plan would be best for your business.  Most of the time, small business owners are concerned with how much it will cost them to operate the plan.  We’re going to walk through some scenarios that should cover just about everyone’s situation and hopefully by the end of this article you can better choose a retirement plan that will help your business and help you save for your retirement and possibly help you retain and attract better employees.

Let’s start out with a small business profile that is just a one person type of business that has no employees.  If you are wanting to put away a lot of money for retirement, one of the best options would be a SEP IRA.   All contributions are made by the employer up to 25% of business earnings or compensation, whichever is less.  The maximum in 2023 is $66,000.  You could ultimately put away up to $66,000 into a SEP if you have enough income to max it out.  These contributions are made before taxes and grow tax deferred until retirement age.  The SEP also has some flexible contribution deadlines as well.  You actually have until you file your taxes to make the contribution to the plan.  If you have to file an extension for your prior years taxes, then you have until the end of that extension to make your SEP contribution for the previous year.  The SEP IRA is by far the easiest way to set up a retirement plan for Self Employed individuals who do not have employees.  If you have employees, you must remember you have to contribute the same percentage for the employees that you contribute for yourself.  If you’re putting 25% into the plan for yourself, then you have to put 25% of the other employees’ compensation into the plan for them as well.

If you are a small business owner and you are the only person in the business, and you would like to make ROTH contributions, which are after tax, then you may want to consider a Roth Solo 401k.   The solo 401k does require  a form 5500-EZ to be filed each year and the contribution limit is $22,500 in 2023 with a catch up of $7,500 if you are over 50.  Your contributions will go in after tax, and when you retire after 59 ½ your withdrawals are tax free. Another reason to consider doing a Roth solo 401k instead of a regular Roth IRA, if you or your household have more than $228,000 in modified adjusted gross income, you cannot make that contribution.  That does not apply to the Roth solo 401k.  This option is best for single person businesses seeking a ROTH type contribution that do not meet eligibility for a ROTH IRA or want to contribute more than the ROTH IRA limits.

If you are a small business owner and have 100 or fewer employees, one of the easiest plans to establish is a SIMPLE IRA plan.  These plans allow you to contribute up to $15,500 in 2023 with a catchup contribution of $3,500 if you are over 50 years old.  These contributions go in before tax and there are no major reporting requirements for this type of plan.  The employer usually has 2 options for matching the employee’s contribution. You can contribute 100% up to 1%, 2%, or 3%  or you can put in a straight 2% for anyone that meets the eligibility requirements to participate in the plan.  This plan gives the employer some flexibility on what they can afford to contribute for their employees, while still providing a desired benefit to help attract and maintain their employees.  The fees associated with a SIMPLE IRA are minimal compared to other types of retirement plans that require a Third party administrator, which is another bonus for a small business owner.

If you’re a small business owner with more than 100 employees, or you have less than 100 employees and you would like to offer better matching and higher contribution limits, then you want to consider a 401k plan.  This type of plan does require some annual reporting and maintenance by the employer that could be somewhat cumbersome if the small business does not have the personnel to help handle the ongoing oversight of the plan activity.  Each 401K plan needs to have a plan sponsor that is typically an employee in the HR role that handles payrolls and onboarding of employees.  This is typically the contact person between the third party administrator and the employer to make sure everything is being completed properly with the plan.   401k’s also offer the ability to make the contributions before or after tax on the participant level if the employer allows the plan to offer it.  The contribution limits for 2023 are $22,500 with a catchup contribution of $7,500 if you’re 50 or older.  The employer has a lot more flexibility on matching contributions with a 401k plan as well.  You can contribute as much as you’d like, but you have to remember there is annual testing to make sure the plan is not overly in favor of highly compensated employees and officers, which is completed by the third party administrator each year along with the reporting of the 5500 report that goes to the IRS.  The 401k plan is probably best for those employers that have several employees, are trying to provide a benefit that attracts and retains employees, and who can afford to provide a larger match for their employees.

With each of these plans, you typically have a menu of mutual funds and/or ETF’s to choose from to allow your money that you have contributed to be invested.  The SEP IRA provides the most flexibility with investment options as you can put into a variety of vehicles.  While the SIMPLE IRA, and 401k plans typically only have certain funds to choose from like a Target Date fund that invests based on your retirement date or an allocation fund that is focused more on your style of investing like Growth.  Whichever type of plan you choose, your financial advisor can assist with helping you make the right decision on the plan and the investments within the plan.  It’s also a good idea to consult with your tax professional to make sure the plan you and your financial advisor set up will be the best option for your business tax wise as well.

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