Best Retirement Plans for Small and New Business Owners
Establishing a retirement plan for your small businesses or self-employment endeavor can be one of the most important decisions that you can make. Your options range from IRAs to self-employed 401(k) plans. What’s best for your needs?
The responsibility of owning and operating a small business can be overwhelming at times. Every decision – from putting together a budget, creating a business plan, and looking for funding – is yours and yours alone. With so much to act on and think about it is easy to set aside long-term planning. You don’t have the luxury of an employer offering a 401(k) or pension plan, complete with a selection appropriate investment vehicle, to ensure your financial future. It’s all up to you!
But no need to worry because Elevation Investment Consulting can assist you with long-term planning issues that are critical to your personal success as a small business owner, particularly when it comes to planning for your retirement.
There are a number of retirement solutions that can help you secure your future and that of your employees, but the decision-making process can be challenging. Here are a few questions to ask yourself before deciding on a retirement plan:
Do you have employees or expect to in the future?
Is it important that employees are able to contribute to a retirement plan?
Is your priority higher contributions or ease of administration?
Would you like plan contributions to be deductible as a business expense?
The two most popular retirement savings options for new and small businesses are the SEP IRA and the solo 401(k). The SEP IRA is the most popular retirement savings option among our small business clients. The low fees, combined with a minimal administrative burden and lower maintenance requirements makes this an attractive options for new and small business owners alike. The solo 401(k) is another great, but widely underreported options. It combines the ability for business owners to maximize plan contribution and at the same time particularly for those focused on growing their businesses, allowing the flexibility of being able to borrow against plan assets.
SEP IRA: Best Retirement Plan for a Sole Proprietor Who Wants Easy Administration
Any small business including a limited liability company (LLC) is eligible to establish a Simplified Employee Pension (SEP) IRA. SEPs which were designed to make it easy for small-business owners, self-employed individuals, and freelancers to set up tax advantaged retirement plans. It is important to be mindful of the fact that the rules vary depending on whether or not you are a sole proprietor, you have employees, or whether or not your business is a corporation.
The IRS allows employers to contribute as much as 25% of an employee’s gross annual compensation. For LLCs set up as unincorporated businesses, such as sole proprietorships, partnerships, and limited liability partnerships (LLPs), plan contributions may be up to 20% of the business owner’s modified net profit. In 2023, the annual contribution made under either of these scenarios cannot exceed $66,000 (up from $61,000 in 2022).
Should you decide to higher employees, they must also be covered under the plan if they meet the eligibility requirements.
Solo 401(k): Best Retirement Plan for Maximizing Contributions
If you are self-employed and don’t employ others, you are eligible to start a solo 401(k) plan. You may also hear a solo 401(k) plan be referred to as an independent or Uni-K plan. The Solo 401(k) has some benefits over other types of retirement accounts that may be game-changers.
First, there are a few eligibility requirements to start a solo 401(k). You must: a) have a profitable business and, b) the business must be run by you alone, or you and your spouse. This can be a great option newly formed small business owners such as sole proprietors, independent contractors, and freelancers !
Since contributions are a combination of “employee” and “employer”, you can contribute up to $66,000 or $73,500 if you are 50 or older in any given year. Unlike any other plans, you may be able to borrow against a portion of the plan assets.
Feel free to check out our Quick Reference Guide: 401(k) Types to learn more about the options available to you such as: Traditional 401(k) Plan, Safe Harbor 401(k) Plan, SIMPLE 401(k) Plan, and the Roth 401(k) Plan.
Tax incentives
Under the new SECURE 2.0 act, employers may have the ability to receive a tax credit for plan start-up costs. This includes an additional $500 credit for eligible employer plans that offer automatic enrollment features. Please consult your tax advisor for eligibility rules and limits.
At the end of the day, owning and running a small business can be an all-consuming endeavor. Things like retirement planning can fall to the wayside amid more pressing concerns, like paying the bills and growing the business.
Let Elevation Investment Consulting be a resource to you and your growing business. The time you invest now into retirement planning is critical, and chances are if you don’t start planning it may not get done.
*Looking for Employee Retirement Plans for your company? If you would like more information to help you choose the one that’s right for you, contact Elevation Investment Consulting today for a complimentary assessment of your situation.