As a Small Business Owner, What Are Your Retirement Plan Options?

Being self-employed gives you a certain measure of freedom, but it definitely doesn’t give you an out on skipping on something as important as saving for retirement.

There’s an argument that it makes putting money away that much more critical, because unlike an employee who might have access to a 401K, you’re on your own.

So what are your options? You’re definitely not left without them, that’s for sure. Let’s go over what the right IRA custodian and administrator can do for you and your business.

Traditional or Roth IRA

Best for: Those just starting out, or saving less than $6,000 a year. If you’re leaving a job to start a business, you can also roll your old 401K into an IRA.

IRA contribution limit: Up to $6,000 in 2020, plus a $1,000 catch-up contribution for those 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.

Solo 401K

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

Contribution limit: Up to $57,000 in 2020 (plus a $6,000 catch-up contribution for those 50 or older) or 100% of earned income, 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 401K, with salary deferrals of up to 100% of your compensation or $19,500 (plus that $6,000 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.

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 $285,000 in 2020.

Tax advantage: This plan works just like a standard, employer-offered 401K: You make contributions pre-tax, and distributions after age 59½ are taxed.

SEP IRA

Best for: Self-employed people or small-business owners with no or few employees. A SEP IRA is an acronym for Simplified Employee Pension plan, it has low start-up costs, which makes it attractive for business owners.

Contribution limit: The lesser of $57,000 in 2020 ($56,000 in 2019) or up to 25% of compensation or net self-employment earnings, with a $285,000 limit on compensation 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.

Tax advantage: You can deduct the lesser of your contributions or 25% of net self-employment earnings or compensation — limited to that $285,000 cap per employee in 2020 — on your tax return. Distributions in retirement are taxed as income. There is no Roth version of a SEP IRA.

SIMPLE IRA

Best for: Larger businesses, with up to 100 employees. SIMPLE is also an acronym for Savings Incentive Match Plan for Employees.

Contribution limit: Up to $13,500 in 2020 or $13,000 for 2019 (plus catch-up contribution of $3,000 if 50 or older). If you also contribute to an employer plan, the total of all contributions can’t exceed $19,500.

Tax advantage: Contributions are deductible, but distributions in retirement are taxed. Contributions made to employee accounts are deductible as a business expense.

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