Small business owners can create a win-win scenario for their company and themselves by establishing a small business retirement plan. Whether you are a solopreneur or a business with some employees, the benefits of having a retirement plan are worth exploring.
Offering retirement plans that attract talented job seekers to boost their bottom line while reaping tax benefits is a smart move. Experienced and skilled applicants will want to find their perfect fit in a role that offers growth and security. Business owners want to retain that talent while also finding ways to make their organizations flourish.
A self-sustaining internal platform requires finding a comprehensive and tax-beneficial retirement plan that is straightforward and adaptable. This is why it's important for small business owners to compare small business retirement plans. Comparing plans can help them find a retirement plan that suits their organization’s and employees’ retirement saving needs.
Some small business retirement plans are designed to accommodate self-employed business owners. Other plans were created for small business owners with a few to a hundred employees in mind. There are also individual retirement plans for employees of small businesses.
As a small business owner, choosing the best plan can seem like a daunting task. There is a lot of information to go through. It can feel like a never-ending struggle. Having a knowledgeable retirement plan expert on your side can be helpful when selecting the right plan for your business.
In this guide, we’ll go through each type of small business retirement plan and the benefits covered under each one.
TOPICS
- Why Set Up a Retirement Plan for Your Small Business
- Types of Retirement Plans for Small Business
- Best Retirement Plans for Small Businesses
- Simplified Employee Pension Plans (SEP-IRA)
- SEP IRA Contributions and Limits
- SEP IRA Withdrawal Rules
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs
- SIMPLE IRAs Contributions and Limits
- SIMPLE IRA Withdrawal Rules
- Contribution Limits for More than One Retirement Account
- Solo 401(k) Plans
- 401(k) Contributions and Limits
- Solo 401(k) Withdrawal Rules
- Solo 401(k) Loans
Why You Should Set up a Retirement Plan for your Small Business
Small businesses offering tax-advantaged retirement plans have a host of incentives to consider. For one, retirement plans benefit small business owners by offering employees financial security through saving for their future. Offering premium retirement benefits means that you can more easily recruit from high-performing candidate pools and retain workers. Decreased turnover rates can help significantly cut costs associated with onboarding new employees.
Another incentive is that businesses may qualify for tax credits by offering their employees retirement plans. In many cases, the tax credits received are proportional to the retirement benefits offered. For instance, generous employee match contributions may allow business owners to qualify for even greater tax deductions. This creates a win-win situation — you can boost your bottom line while elevating the well-being of your employees.
Small business retirement plans have many advantages. But the most important one is the opportunity for you to save and build your retirement future.
Types of Retirement Plans for Small Business
Small businesses play a vital role as the backbone of the economy of local communities. In the past, providing a retirement plan used to be a heavy burden for a small business owner. These were hard to manage, financially and administratively.
Modern retirement options are designed to be more affordable and accessible for small businesses and their employees. Some of the options included are:
Let’s break down each one of these options. This will help you determine which one is the best retirement plan for your small business.
Best Retirement Plans for Small Businesses
As any small business owner knows, running the ins and outs of operations goes beyond a shrunken version of a large corporation. Small business owners must also consider how changes to tax codes, increased interest rates, and government regulations can affect their profits. These changes can have a major impact on their bottom line. That’s why it makes sense to select a retirement plan tailored to meet the needs of the small business.
When deciding on a retirement plan, it is important to consider the structure, size, and how much you can contribute. This applies for both sole proprietors and businesses with multiple employees.
Some retirement accounts are set up on a pre-tax plan while others are set up to have post-tax plans. Contribution limits can vary according to the type of plan you choose. Eligibility for certain retirement plans can also be affected by the number of employees you have on your team. Regardless, there is a retirement plan out there to suit your small business needs.
Simplified Employee Pension Plans (SEP-IRA)
SEP IRAs are set up so that only the employer contributes to the retirement plan. Each employee must receive the same level of contribution from the employer. SEPs are available to businesses of any size including small companies, sole proprietorships, S corporations, and partnerships.
SEP IRAs are easy to set up and operate, require low administrative costs, and offer flexibility to easily adjust annual contribution amounts if cash flows fluctuate. You can adapt your strategy from year to year. When business is booming, you can make more significant contributions to SEP IRAs.
If business slows down, contributions can be adjusted. This ensures that you spend less on contribution to employee plans.
To be eligible for a SEP IRA, an employee must meet certain criteria. They must have worked for your business for three of the previous five years. They must be 21 years of age or older. Furthermore, they must have received at least $750 in salary in 2023.
Overall, flexible funding, less bureaucratic red tape, lower operational costs, and an easy setup make this retirement plan a great choice for many small business owners.
Simplified Employee Pension (SEP) IRA Contributions and Limits
Annual contributions for 2023 are capped at $66,000 or 25% of the net income — whichever is less. SEP-IRA contributions do not interfere with Traditional and Roth IRA contributions. Therefore, employees can still contribute the maximum amount allowed to private IRAs.
For example, for 2023, the contribution limits are the lesser of 25% of compensation or $66,000. If you choose to offer 10% of compensation as employer contributions, this must apply to all employees.
Simplified Employee Pension (SEP) IRA Withdrawal Rules
SEP IRA account holders should be aware that distributions taken before age 59½ may be subject to a 10% tax penalty. Additionally, they may have additional income tax liability. Finally, the required Minimum Distributions (RMDs) begin at age 73 for SEP-IRA plans.
For example, for 2023, the contribution limits are the lesser of 25% of compensation or $66,000. If you choose to offer 10% compensation as employer contributions, this must apply to all employees.
Savings Incentive Match Plan for Employees (SIMPLE) IRAs
Setting up a SIMPLE IRA is, well, pretty simple. They are available to any small business with 100 or fewer employees. It is important to note that you cannot have more than 100 employees at any given time in the calendar year.
You or your employee will select a financial institution to act as a trust for the retirement plan such as IRAR. The financial institution will assist you. They will provide the documentation and forms required for the same retirement plan benefits for all employees. Once all of the i’s have been dotted and t’s crossed, you and your employees can now start making contributions to their SIMPLE IRAs.
Similar to SEP IRAs, the employer makes contributions. However, employers must deposit employees' salary reduction contributions into their SIMPLE IRA accounts within 30 days after the end of the month in which the employee would have received them in cash. Additionally, they must make all matching or nonelective contributions by the due date (including extensions) of their federal income tax return for the year. The employee can make salary reduction contributions in addition to the employer.
Setting up a SIMPLE IRA requires less legwork and is straightforward compared to a traditional 401(k). They do not require non-discrimination or top-heavy testing programs, making them easier to administer. Small business owners should know that SIMPLE IRAs are only available to businesses that don’t already have another retirement plan.
SIMPLE IRAs Contributions and Limits
As of 2023, employee contributions to a SIMPLE IRA cannot exceed $15,500. Account holders aged 50 and above are eligible to make catch-up contributions of up to $3,500. Contributions to a plan can come from the employee, in the form of salary reductions.
The employer can also contribute, either with matching funds or non-elective contributions. Salary reductions are limited to $22,500 as of 2023. The employer's limits are the 3% of dollar-for-dollar matching you describe below and the nonelective contributions of 2% of employee's compensation up to $330,000 for 2023.
SIMPLE IRAs offer a dollar-for-dollar matching contribution plan capped at 3% of the employee’s net income for that year. This rate can be adjusted but cannot fall lower than 1%. However, this cannot be done for more than two years out of the five-year period. The five-year period ends with the year the election is effective and includes that year.
In the event of this change, the employer must notify the employees within reasonable time before the election period. If the employee decides not to make any contributions, the employer is not obligated to make a contribution.
The other option is to make contributions to a SIMPLE IRA at a 2% flat rate of the employee’s compensation for that year. Regardless of whether the employee has elected to make salary reduction contributions, the employer is still required to contribute 2% of the employee's salary.
Employee contributions made via salary reduction need to be deposited into the employee's SIMPLE IRA within 30 days after the end of the month in which the amounts were taken out of the paycheck. For self-employed people with no common-law employees, the latest date for depositing the salary reduction contributions for a calendar year is 30 days after the end of the year (Jan 30).
SIMPLE IRA Withdrawal Rules
The withdrawal age for SIMPLE IRAs is 59 1/2. The RMD age is 73 for 2023 (first RMD to be taken by 4/1/24). Income taxes are usually placed on withdrawals made.
Additional taxes charged at a rate of 10% may be required if the account holder starts to make withdrawals under the age of 59.5 without a qualifying exception.
The 10% additional tax you must pay increases to 25% if they withdraw money from a SIMPLE IRA plan within25% tax if they withdraw money from a SIMPLE IRA plan within two years of when they first signed up for it.
401(k) Plans
Setting up a business 401(k) plan can be a more cumbersome process for small businesses. Small businesses may find it challenging to manage them independently due to administrative fees and stringent requirements. However, the appeal is that small business owners can claim business tax credits while supporting their employees with a 401(k).
Employers face a greater challenge when managing these plans. They must take on the risk and provide official documentation to the government. Additionally, they must guarantee a certain level of benefits tied to each employee's salary and length of service.
Solo 401(k) Plans
The Solo 401(k) plan for self-employed individuals with no employees has the same tax advantages of 401(k) plans. It follows the same rules. The Solo 401(k) has many names, such as self-employed 401(k) and individual 401(k).
This account type offers spousal benefits to a couple running a business together. The account holder can contribute as both an employer and an employee. This is because, as a business owner, they can take on both roles.
Solo 401(k) Employer Incentives
Businesses that meet the requirements may be able to claim up to $5,000 in startup tax credits. These credits can be claimed over three years. They are intended to help cover the costs of starting a Solo 401(k) plan.
Businesses can qualify for tax deductions by offering an employee match plan. This can be done by auto-enrolling a Solo 401(k) match plan for employees.
Solo 401(k) Contributions and Limits
As of 2023, employee contribution limits for Solo 401(k)s are capped at $22,500 as the employee. Account holders who are 50 or older are eligible to contribute an additional $7,500 in catch-up contributions for a total of $30,000. Contribution matches from the employer are not factored into the employee contribution limit.
However, the IRS does set limitations on total contributions. In 2023, the limit on total contributions from an employee and employer cannot exceed $66,000 or 100% of compensation.
This limit applies to the employee elective deferral limits which is the $22,500 or $30,000 if you are over 50 years of age. This is how much the employee can contribute. Limits on elective deferrals are by person, not by plan. The limit applies to all elective deferrals the employee makes during a year to all employer sponsored Solo 401(k) plans.
The employer nonelective contributions is up to 25% of compensation, up to the total contribution limit of $66,000 for 2023.
It's important to highlight that as a small business owner you wear both hats, you are the employer and the employee.
Lastly, business owners may make a profit sharing contribution of up to 25% of comp. Otherwise, a non-elective contribution is set at 2% of each qualifying employee’s pay must be provided by the employer.
Solo 401(k) Withdrawal Rules
Solo 401(k) plans allow employees to contribute a portion of their salary for different investment options like real estate and other tangible assets. Earnings received from investments are tax deferred, but it depends on what type of 401(k) plan you choose. The employee pays taxes once withdrawals are made.
If the plan has a designated Roth portion (aka Solo Roth 401(k)), this does not require a mandatory distribution or RMD.
Like IRA plans, Solo 401(k)s stipulate withdrawals cannot be made by the account holder without penalty until they are 59.5 years old. There are a couple of exceptions such as if the account holder demonstrates financial hardship to qualify for a hardship withdrawal.
As outlined in the SECURE Act, required minimum distributions can be withdrawn at age 73 for 2023. The first RMD can be taken out by April 1, 2024.
Solo 401(k) Loans
These plans may carry a special feature that allows employees the option to take out loans against their accounts. In order for this to be true, the plan must be established with this provision.
Contribution Limits for More than One Retirement Account
The IRS outlines that if you are not the owner of your employer’s business, you can contribute the maximum to both SIMPLE IRA and SEP-IRA plans. Because annual maximum contribution limits are set, technically, there’s no limit to the number of IRAs an individual may have.
For instance, if an account holder makes higher contributions to their SIMPLE IRA, it will reduce what can be contributed to other IRA accounts. However, contributions can still be made to more than one retirement account.
Self-Directed Small Business Retirement Plans
Small business owners have options to self-direct their retirement accounts. These types of accounts are not limited by investments in stocks, mutual funds, and other traditional assets. They can invest in non-traditional assets such as real estate and private placements.
Self-directed retirement plans allow a plethora of investment options. This allows you to diversify your investments to protect your savings.
Start Contributing Now: The Earlier, the Better!
Retirement plans are a great way for you to plan for the future of your small business and for your employees to plan for their own financial futures. Even with educational resources to reference, navigating this process alone can be a daunting task. Luckily, the knowledgeable professionals at IRAR Trust company are here to help!
If you would like more education on the ins and outs of small business retirement plans, our seasoned retirement account experts are here to help. We have more than 30 years of experience helping investors self-direct their retirement at a lower cost. Our plans are fully self-directed not a managed brokerage account and allow investments in tangible assets.
Contact us today or call us at 888-322-6534 for a free consultation!
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