IRAs For Business Owners: What Every Entrepreneur Should Know

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There are a variety of IRAs for business owners when it comes to choosing a tax-advantaged retirement plan. Whether you own a small business with a few employees, are self-employed, are an entrepreneur, sole proprietor, or do freelance work, you are not limited to a 401 (k) for retirement savings. You're also not limited to traditional investments like stocks, bonds, and mutual funds either.

How do you know which business IRA is right for you and your employees? IRAR is here to break down your options.

What IRA Plans are Available for Businesses?

For many business owners, part of financial planning includes figuring out the best way to set aside some savings for retirement. You can leverage that account further by taking advantage of the tax benefits it provides. The type of retirement plan you choose will be unique to your financial goals and employment situation.

Although it is advisable to consult with a certified financial planner before making an official decision for your small business, educating yourself on the available plans can help facilitate which option is best for you.

Consider the following IRA plans for business owners:

SEP IRA

A Simplified Employee Pension (SEP) IRA is a tax-deductible retirement plan ideally available to freelance workers, the self-employed, and small business owners with few employees, like REALTORS® for example.

The employer or small business sets up the SEP IRA account. The employer also makes the contributions to the employee's account. The contributions to a SEP IRA are tax-deductible for the business. According to Internal Revenue, an employee is eligible to participate in a SEP IRA if he or she:

  • Is at least 21 years old
  • Has worked for the company in three of the last five years, and
  • Has received at least $650 in compensation or employment income during the year.

Employers are not required to fund SEP contributions yearly; however, when contributions are made, the employer must contribute to both their own account and the accounts of all eligible employees.

Contribution limits are set at 25% of your net income or a set cap periodically adjusted for inflation. In 2021, the cap is set to $58,000 and will increase to $61,000 in 2022. This type of account does not offer a catch up contribution.

SEP IRAs appeal to eligible small business owners because they are simple to set up and offer yearly funding flexibility; a good financial year (surplus) means you can make a larger contribution, but lower contributions can also be used to accommodate a year of financial hardship. For example, during the pandemic the employer contributions might have been smaller than in previous years.

Another great advantage of the SEP is that as a participating employee in this plan, you can also have an individual retirement account (IRA) such as a Traditional or Roth IRA.

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is designed for small businesses with less than 100 employees and sole proprietors. This matching contribution plan removes the burden of being the primary contributor from the employee; both the employer and employee make contributions to this fund while accessing valuable tax benefits.

Employers can match employee contributions equally at a rate of 1% to 3% of their employees' salaries. Or, they can make non-elective contributions equal to 2% of salary, regardless of whether a worker contributes. 

Employees should keep in mind that while they won't pay capital gains taxes while investment transactions occur within the account, they should financially prepare themselves for taxes on withdrawals during retirement like normal income.

Solo 401(k)

Individual 401(k) plans can be established if you own a business with no full-time employees (excluding your spouse.) Depending on your IRA provider or custodian, they may be known as Self-Directed solo 401(k), Individual Roth 401(k), Self-Employed 401(k), Personal 401(k), One-Participant 401(k), Solo 401(k), Solo-k, Uni-k, or One-Participant k.

Other Retirement Accounts

All though the following retirement plans are more for individual investors, we see business owners incorporate these into their retirement savings strategy.

Traditional IRA. If you plan to stash away a small amount of your income each year, a Traditional IRA can accommodate your needs.

Account-holders are able to contribute a maximum limit of $6,000 per year which then increases to $7,000 for those who are 50 and above. Funding an IRA contribution may provide account holders with an immediately deductible tax break. In the future, once you start to make withdrawals from your IRA, you'll be required to report it as taxable income.

If you have a Traditional IRA, you may also be eligible to participate in a SEP IRA. Because your employer (this could be your business) makes a contribution to your SEP IRA, you can make a contribution to your Traditional IRA. In this case, both the business and you as the employee may be eligible for a tax-deduction.

Make sure to review your financial strategies and retirement planning with a qualified financial professional.

Roth IRA. If you don't need the deduction immediately (this year), or you're in a low tax bracket but you still want to fund your pending retirement, a Roth IRA could be a good option for you.

Although it does not feature an immediate tax benefit, the account grows tax-free. When you make qualified future withdrawals, you will not be required to pay taxes on the account funds. At age 59½, you can withdraw both contributions and earnings with no penalty. Roth IRAs also have a yearly limit of up to $6,000 or $7,000 for those 50 and older. 

A small business owner may choose a self-directed Roth IRA as a strategy to purchase their retirement home. They usually start contributing to their account early or young in their careers. They make maximum contributions annually until the IRA has enough funds to purchase real estate outright.

When the Roth IRA has enough funds, it can purchase the desired retirement home. Then, when the IRA owner is of retirement age, he or she can take the home as a distribution. In the meantime, the IRA owner cannot live in it or use it personally. Prohibited transactions rules still apply.

Keep in mind that varied alternative investments like real estate, private companies, and private stock are available through any these tax-deferred accounts if self-directed.

How Can IRAR Help?

For nearly 30 years, our dedicated team of self-directed investment experts have helped clients with retirement saving resources. Our goal is to help you to build wealth by leveraging alternative investments through self-directed accounts. Book a free consultation with one of our expert IRA custodians to find out more about how you as an employer and your employee can both start benefiting from a tax-advantaged IRA retirement plan.

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