Choosing the right retirement savings vehicle for your business can be one of the most important decisions you make as an entrepreneur. Each plan has unique features, benefits and requirements. When considering what retirement plan suits your business, you will want to analyze the administrative costs, operation restrictions, and attractiveness to potential employees.
Given the scarcity of pension plans, many workers are asking what retirement savings plans are offered when considering a job. There are three main retirement plan structures that often rise to the top for many entrepreneurs. Here is your guide to the three most common and what to consider when deciding which may be right for you and your business.Â
SEP IRAs, SIMPLE IRAs, and Solo 401(k)s are retirement plans tailored for small business owners and self-employed individuals.
SEP IRA (Simplified Employee Pension)
- Who It’s For: Sole proprietors, small business owners with employees, and self-employed individuals.
- Contribution Limits: Contributions can be up to 25% of an employee’s compensation or 20% of a self-employed individual’s net income, capped at $69,000 (as of 2024).
- Employee Involvement: Employers must contribute the same percentage to each eligible employee’s account if they contribute to their own SEP. Employees cannot contribute.
- Ease of Setup and Maintenance: Simple to set up and maintain with minimal administrative costs.
- Pros: High contribution limit, flexible contributions, and tax-deductible for employers.
- Cons: No employee contributions allowed, and the employer must contribute an equal percentage for all eligible employees.
SIMPLE IRA (Savings Incentive Match Plan for Employees)
- Who It’s For: Small businesses with up to 100 employees and self-employed individuals.
- Contribution Limits: Employee deferrals are allowed up to $16,000 (as of 2024), with a $3,500 catch-up contribution for those aged 50 or older. Employers must match contributions up to 3% of compensation or make a non-elective contribution of 2% for all eligible employees.
- Employee Involvement: Employees can contribute through salary deferrals, and the employer is required to make either matching or fixed contributions.
- Ease of Setup and Maintenance: Relatively easy to set up and manage, with modest administrative requirements.
- Pros: Both employees and employers can contribute; good option for small businesses that want to offer retirement savings without high administrative costs.
- Cons: Lower contribution limits compared to SEP and Solo 401(k) plans, and mandatory employer contributions.
Solo 401(k)
- Who It’s For: Self-employed individuals and business owners with no employees other than a spouse.
- Contribution Limits: Up to $69,000 for 2024, plus an additional $7,500 catch-up contribution if aged 50 or older. Contributions are split between an “employee” deferral (up to $23,000 or $30,500 with catch-up) and an “employer” contribution (up to 25% of compensation).
- Employee Involvement: Only the business owner (and their spouse if employed by the business) can contribute.
- Ease of Setup and Maintenance: Slightly more complex to set up than SEP or SIMPLE IRAs, but manageable with the help of a financial institution or financial advisor.
- Pros: High contribution limits; allows for both employee and employer contributions; can be structured as a Roth for tax-free withdrawals in retirement.
- Cons: Only available to businesses without employees; more paperwork than SEP and SIMPLE IRAs, including annual Form 5500 filing once the plan reaches $250,000.
Comparison Summary
| Feature | SEP IRA | SIMPLE IRA | Solo 401(k) |
|---|---|---|---|
| Best For | Sole proprietors, small businesses | Small businesses with up to 100 employees | Self-employed individuals with no employees |
| Employee Involvement | Employer contributes only | Employee & employer contributions | Employee & employer contributions |
| Contribution Limits | 25% of compensation up to $69,000 | $16,000 + $3,500 catch-up (employee deferral) | Up to $69,000 + $7,500 catch-up |
| Employer Contribution | Flexible; must be equal for all employees | Mandatory 3% match or 2% non-elective | N/A; employer is usually the owner |
| Administration | Low | Low | Moderate, with Form 5500 filing |
If these retirement plan options are more extensive than your needs, funding a Traditional or Roth IRA is another alternative for putting money aside for the future. These retirement saving vehicles allow for contributions up to $7,000 for those under 50 years old and $1,000 catch-up for those 50 and older (as of 2024).
Comparison Summary
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Best For | Individuals seeking immediate tax benefits | Individuals wanting tax-free retirement income |
| Tax Treatment of Contributions | Tax-deferred growth with potential deductions | After-tax contributions, no immediate tax benefit |
| Eligibility | No income limit (for non-deductible contributions) | Income limits apply for eligibility |
| Withdrawal Rules | Taxes on withdrawals; penalties may apply for early withdrawals | Tax-free withdrawals on qualified distributions; contributions can be withdrawn anytime |
| RMDs | Required starting at age 73 | No RMDs during account holder’s lifetime |
Read Also: Entrepreneur’s Guide to Business Structures
Each of these retirement plans offers a path to tax-deferred savings, but the best choice will depend on your unique business, whether you have employees and your contribution goals. Contact Tull Financial Group today at (757) 436-1122 to discuss your distinct business needs and to schedule a free initial consultation.