As a small business owner, you want to make the most of your money and save wisely for retirement. While you’re focused on running your business, it’s a good idea to let a financial advisor work on your future. However, it’s important for you to be involved and know your options. Let’s discuss retirement plans available to you and potentially your employees. There are five main plans to choose from: an IRA (traditional or Roth), a SEP IRA, a Simple IRA, a solo 401(k), and a defined benefit plan.
First, you’ll need to sit down with a financial advisor to discuss how much you need to save for retirement. You’ll also need to discuss whether or not you’re offering retirement to your employees (if applicable). This will help you and your advisor determine which plan is right for you and your company. Now it’s time to figure out where to put the money you’ve designated for retirement. Let’s layout the options in a table so it’s easy to compare them. This can come in handy when meeting with your financial advisor.
Note: For now, we will simply cover the basics of each plan. Then you can talk in depth about it with your financial advisor.
| Who is it for? | Benefits | Contribution
limit |
Taxes | Accessibility | |
| Roth IRA | Those just starting out, saving less than $6,000/year | Tax benefits- tax-free withdrawals in retirement | Up to $6,000 (as of 2024), plus a $1,000 “catch-up” contribution for those over 50. | Withdrawals in retirement are tax-free | Withdrawals must be taken after a five-year holding period (w/ exceptions) |
| Solo or Self-employed 401(k) | Self-employed individual with no employees other than a spouse | A 401(k) with higher contribution limits than SEP IRA | Up to $57,000 (plus a $6,000 catch-up for those over 50) or 100% of earned income, whichever is less | Contributions pre-tax, and distributions after age 59.5 are taxed | No withdrawals until a “trigger” event such as turning age 59½, disability, and/or plan termination |
| SEP IRA | Self-employed or small business owner, including with employees;
sole proprietors, partnerships |
Flexible funding requirements
Range of investment choices |
Up to 25% of earned income- maximum of $57,000 | Deduct the lesser of your contributions or 25% of net earnings | Withdraw any time, but 10% penalty applied unless over age 59.5. |
| Defined benefit plan | Self-employed person with no employees who has a high income | Save high amounts; guaranteed stream of income | Calculated based on the benefit you’ll receive at retirement, your age and expected investment returns | Contributions tax deductible;
Retirement distributions taxed as income |
Comes with fees and expensive |
| Simple IRA | Self-employed individuals and Businesses with 100 or fewer employees | Salary deferral plan with less administration
Electronic funding with customization |
Match employee contributions up to 3%;
up to $5,700 |
Contributions made to employee accounts are deductible as a business expense | Same as SEP IRA, but penalty increases to 25% if withdrawn within first 2 year |
If you are just starting out as a small business owner, a Roth IRA might be the way to go. If your business is making you and your employees a significant amount of money, a defined benefit plan might be the better option. Like we said, this table is the tip of the iceberg, and you’ll need to sit down with your trusted financial advisor(s) to figure out which plan best benefits you and your employees (if applicable). For now, you’ll at least have an overview of your options to start thinking over.
Aspis Advisors daily prepares retirement plans for small business owners in Birmingham, AL. They can be reached at (205) 444-5588.
