Retirement Plans for Small Business Owners
Retirement planning for business owners is more involved than typical workers. In addition to planning for your retirement, you need to consider what’s right for your business and your employees. Businesses that offer comprehensive benefits packages have a significant advantage when it comes to attracting and keeping employees. Over 44% of business owners responding to BizBuySell’s most recent Insight Report survey share they are planning to sell their business in 2023 to retire. So, between planning for your retirement and that of your employees, you can never start too early. The best retirement plan for you and your business will depend on many factors, including the structure of your business. Between 401(k) and IRA plans, there’s an option just right for you and your workforce.
401(k) Plan Options
401(k) plans are retirement savings plans offered by many employers in the United States with tax advantages for the saver. A percentage of each paycheck is paid directly into an investment account. Employers may match part or all of the contribution. Employees are able to manage the investment options for their savings fund.
There are a few different types of 401(k) plans available for business owners to take part in. Depending on the business structure, number of employees, and tax advantages, some 401(k) plans may be more beneficial than others. Employer contributions vary by plan and are subject to annual limits. Consult with professionals and financial institutions to help establish and maintain the plan you select for your business.
- Traditional 401(k) With a traditional 401(k), contributions are made with pre-tax dollars and you pay taxes at the time of withdrawal.
- Automatic Enrollment 401(k) An automatic enrollment plan states that employees will be automatically enrolled unless they elect otherwise. There are a dozen states that mandate employers provide retirement plan options to eligible employees.
- Solo 401(k) This plan is designed like an individual retirement account for small business owners with no employees. You can make contributions to a Solo 401(k) as an employee and employer. The plan can be set up as a traditional 401(k) with tax-deferred contributions or a Roth IRA with contributions in after-tax dollars.
- Safe Harbor 401(k) is similar to a traditional 401(k) where the plan must offer some kind of employer contribution to the employee’s account through either non-elective contributions, basic matching, or enhanced matching. This plan is beneficial to many small businesses as it allows companies to avoid some regulations and expenses associated with nondiscrimination tests that are typically required with other 401(k) programs.
IRA Plan Options
Business owners can also consider offering an individual retirement accounts (IRA) for retirement savings. IRAs are one of the easiest ways for business owners to save for retirement, as they’re fairly simple to establish and manage. They also have generous contribution thresholds and offer tax benefits. Similar to 401(k) plans, employer contributions vary by plan and are subject to annual limits. While some IRA plans are easy to set up, it’s still wise to seek the advice of professionals and financial institutions to help establish and maintain the plan you select for your business.
- Payroll Deduction Individual Retirement Account (IRA) Employees establish either a traditional or Roth IRA with a financial institution and allow their employer to make payroll deductions.
- Roth IRA With a Roth IRA, you make contributions after taxes and withdrawals (subject to certain rules) are not taxed.
- SEP IRA (Simplified Employee Pension) Much like a traditional IRA, a SEP IRA allows you to make tax-deferred contributions to the plan up to predetermined limits. If you have employees who are eligible to participate under IRS rules, you, as the employer, are also required to contribute to their accounts.
- SIMPLE IRA (Savings Incentive Match Plan for Employees) This is a traditional IRA plan for sole proprietorships, those who are self-employed, and employers with fewer than 100 employees. Employer contributions are mandatory with a SIMPLE IRA.
As a business owner, you must be mindful of retirement planning—both for yourself and your business. Considering the logistics of your retirement from the business you own takes time and careful deliberation. The best plan depends on many factors: the size of your business, how much you’re able to contribute on a yearly basis, and how much administration responsibilities you’re able to manage. Reach out to professionals and financial institutions if you need help with creating and maintaining a retirement plan that is right for you, your staff, and your business.