Best Retirement Plans for Self-Employed Business Owners

Are you a boomer that is looking start a second career as a self-employed business owner?  Maybe you’re an established business owner that is now looking to both get a nice tax deduction while offering an incentive for you loyal employees.

No matter your situation, when it comes to choosing the best retirement plan for your business, you have a lot of choices. You may not have realized just how many choices in retirement plans you have. But you do, and asking the right questions may represent the first step toward implementing the right plan for your future or your company.

Depending on the size of your business and how profitable you are (how much extra money do you have to put away) will be the largest determinant of what retirement plan is best. We’ll look at the business retirement plans in order of size for your business: small to large.

Traditional IRA.

If it’s just you running the business and you plan being able to save much in the first couple of years, then it might make sense just to open a Traditional IRA.  The administrative cost is low and you’ll be able to sock away $5,000 if under 50 with a $1,000 catch up for you boomers over the age of 50.

Don’t care as much about the tax deduction?  You can always enjoy the tax-free benefits of opening a Roth IRA.  Here are the limits of the Roth IRA.

The SIMPLE IRA.

The Simple IRA is  small business retirement plan with mandatory employer and optional employee contributions and a $11,500 annual contribution cap. But in this plan, there is one big difference for the business owner. If the business is not doing well, the owner can reduce plan contributions. The employer contributions are still 100% vested from the beginning.

The SEP-IRA.

This employer-funded plan is designed for businesses with 25 or fewer employees. The employer contributions are 100% vested from the start, and the employer can supplement the SEP-IRA with another retirement plan. Currently, these plans have a $49,000 maximum contribution limit, and an individual’s personal contribution limit depends on such factors as service, performance, and salary.  The distribution rules of a SEP IRA are very similar to a traditional IRA.

The Traditional 401(k).

Best Retirement Plans for Self-Employed Business Owners

Many people have this type of retirement savings plan, and it works like this: The plan is funded with pre-tax dollars taken out of your paycheck (through payroll deductions). If you’re lucky, your company will match your level of contribution or even make contributions on your behalf – after all, the employer contributions are tax-deductible.

The I.R.S. will currently let you put up to $16,500 a year in a Traditional 401(k). However, many employers will only let you contribute up to 10% (or less) of your annual salary. The IRS also allows catch-up contributions (additional contributions from those aged 50+), with a current annual limit of $5,500.

There are several variations on the traditional 401(k) theme …

The Safe Harbor 401(k). 

A byproduct of the Small Business Job Protection Act of 1996, the Safe Harbor plan combines the best features of the traditional 401(k) and a SIMPLE IRA, making it very attractive to business owners. With a Safe Harbor plan, an owner-operator can avoid the big administrative expenses of a traditional 401(k) and enjoy higher contribution limits (currently, a maximum dollar cap of $49,000 in total employee and employer contributions). The Safe Harbor plan allows for employers to make matching or non-elective contributions. Typically, employers match contributions dollar-for-dollar up to 3% of an employee’s income.

The SIMPLE 401(k). 

Designed for small business owners who don’t want to deal with retirement plan administration or non-discrimination tests, the SIMPLE 401(k) is available for businesses with less than 100 employees. Like a Safe Harbor plan, the business owner must make fully vested contributions (up to 3% of an employee’s income). But the maximum pretax employee contribution to a SIMPLE 401(k) is $10,500, and employees with a SIMPLE 401(k) can’t have another retirement plan with that company.

The Solo 401(k).

Combine a profit-sharing plan with a regular 401(k), and you have the Solo 401(k) plan, a retirement savings vehicle designed for sole proprietors, owners of mom-and-pop businesses, and even those who have a small, legitimate business “on the side” while they work for another employer. These plans currently permit you to contribute up to $49,000 annually. You can invest Solo 401(k) assets in real estate, and your Solo 401(k) can also borrow money (up to 50% of the account value or $50,000, whichever amount is smaller). However, if your business grows and you add employees other than your spouse, your Solo 401(k) has to convert to a SIMPLE 401(k) or a Traditional 401(k).

The Roth 401(k). 

Imagine a Traditional 401(k) fused with a Roth IRA. Here’s the big difference: you contribute after-tax income to a Roth 401(k), and when you reach age 59½, your withdrawals will be tax-free (provided you’ve had your plan for more than five years). The annual contribution limits are the same as those for a Traditional 401(k) plan.

You can roll Roth 401(k) assets into a Roth IRA when you retire – and you don’t have to make mandatory withdrawals from a Roth IRA when you turn 70½. With a standard 401(k), you have to roll over the assets to a traditional IRA and make the required withdrawals. (restrictions, limitations and fees may apply)

The Keogh Plan.

The Keogh is designed for professional practices and family businesses with ten or fewer highly paid employees. It can be either a defined benefit plan with a $195,000 annual contribution limit and a fixed, pension-style income for the employee in retirement, or a defined contribution plan with a $49,000 annual contribution limit and freedom for employees to make their own investment decisions.

Self-Employed Business Owners Have Many Options

If you are an employer, you may not have realized you have such an array of choices in retirement plans. But you do, and asking the right questions may represent the first step toward implementing the right plan for your future or your company. Be sure to ask a qualified financial advisor or business retirement plan consultant about your options today.

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