Without doubt, small businesses continue to play a crucial role in the economy and remain the locomotive power of innovation and growth. Small businesses account for more than 50% of nonfarm private GDP and employ 56.1 mln. (half of all private-sector workers.)
While everybody wants to be their own boss, being a small business owner has many responsibilities and enormous amount of hard work. Not only you have to paddle your own canoe, but you must also handle a lot of things, like creating a budget, business development, managing people, and never-ending meetings.
Besides business issues, small business owners should think and plan for retirement, which solely falls on their shoulders. Lack of time and understandable desire to re-invest all proceeds back into the business leaves retirement out of scope for many business owners. And that is the root of the problem. The prevailing thinking among business owners is to grow the business, sell it, and fund the retirement. It is an excellent plan except for the fact that 80% of small businesses listed for sale never sell. Just imagine what you would do if it was your case. How would you fund your retirement?
One of the best decisions you can make is to diversify your investments, become less dependent on your business, and start saving for your retirement now. Thankfully, there are a lot of retirement plans that allow:
- Tax-deferred money growth
- Deduct business expenses and minimize your taxes
- Increase employee retention
- A tax credit of up to $500
Let’s compare key retirement plans available for small businesses.
SEP IRA | SIMPLE IRA | SIMPLE 401(k) | Solo 401(k) | |
Availability |
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Key advantages |
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Who contributes |
Employer only |
Employer and employee |
Employer and employee | Employer and employee |
Establishment deadline |
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Employee eligibility |
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Employer contribution limits |
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Employer is required to contribute each year either a:
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Employer is required to contribute each year either a:
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Employee contribution limits | None |
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Contributions deadlines |
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Salary deferral contributions must be made:
Profit-sharing contributions must be deposited
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Employer filings | Not required | Not required | Form 5500 | Form 5500 if plan assets exceed $250,000 |
Sponsorship of other retirement plans | Allowed | Not allowed | Not allowed | Allowed |
Designated Roth account | No | No | Yes | Yes |
Vesting | 100% vested immediately | 100% vested immediately | 100% vested immediately | 100% vested immediately |
Participants loans | Not permitted | Not permitted | Permitted | Permitted |
Automatic enrollment | No | Yes | Yes | Yes |
In-service withdrawals |
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Nondiscrimination testing | No | No | No | No |
Choosing the right plan
Before you decide which plan is right for you, there are three main things to consider:
Employee coverage
Are you going to hire employees or operate as a self-employed? For the latter consider a Solo 401(k), otherwise a SEP IRA and SIMPLE would work the best.
Contributions limits
How much are you willing to contribute towards your plan? Have a clear understanding of your potential earnings over the next few years. If your income is expected to be stable and relatively high then the Solo 401(k) is a good option. However, if your income is not going to be stable and will depend on various “what if” scenarios, consider the SEP IRA as it provides more flexibility and discretion over contributions.
Administrative expenses
Even though all plans cost low and easy to operate, the Solo 401(k) can become an issue once plan assets exceed $250,000. Plan in advance.
No matter what plan you choose, the only way to go wrong is not choosing one at all. Each plan provides you with an opportunity to grow your business in a tax-efficient way, generous contributions limits, and backs you up in the retirement just in case something bad happens.
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