Small Business Retirement Plans

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Jar with money inside - Small Business Retirement Plans
Ruth Albertson
Ruth Albertson
October 25, 2020
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Category:
Accounting & Finance

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UPDATED:
October 14, 2020

As a self-employed individual or a small business owner, you have a great deal of freedom when making decisions for your company. However, that same freedom can create a great deal of confusion regarding retirement savings as no one from human resources is setting up the perfect plan for you or matching your contributions.

It may seem challenging to make this decision, especially if you are already wondering how to juggle multiple projects. Still, it is an important one that will significantly impact your financial future and your employees’ satisfaction. No matter what type of plan you choose, you will want to save at least 10% of your income each year. If you have already reached middle age or beyond, you may want to save 20% or more. Consider the following five types of business retirement plans popular among the self-employed and small business owners.

The Five Best Types of Small Business Retirement Plans‍

Today, you can choose from various retirement plans based on the size of your business and your overall financial goals.

1. Individual 401(k) Plans‍

Personal 401k Plan paper

You do not have to write off the traditional 401(k) plan just because you are a small business owner. Also called a solo 401(k), this plan lets you contribute to the set limit, which changes each year, or up to 25% of your compensation. There is very little paperwork that goes along with this plan, and it will not cost you very much to run. When you have more than $250,000 in your plan, you will need to file Form 5500. You can choose from a wide range of mutual fund investment opportunities for your plan, including stocks and bonds.

2. Roth IRA‍

The Roth IRA is similar to the traditional IRA except that distributions from it are tax-free as the taxes are prepaid when you contribute. You can continue contributing to your IRA well past retirement age if you like and can leave money in your IRA throughout your life. While you can only contribute $6,000 per year to this IRA, if you are under the age of 50, it is still an excellent investment that is simple to use later in life. If you are older than 50, you can make an additional $1,000 in contributions each year to catch up.

3. SEP-IRA‍

The Simplified Employee Pension Plan, also called the SEP-IRA, is another simple option that makes a good choice if you have only a few employees. In this plan, you must make contributions for every employee each year but are not forced to contribute a certain amount. Also, your employees will not make any contributions themselves. If you are just starting up, you may be able to get a small tax credit for the first three years after beginning the SEP-IRA. Employees can withdraw money at any time but will face a penalty if they start too early.

Simple IRA Contract

‍4. Simple IRA‍

If your business is a little bigger, you could consider the SIMPLE IRA or Savings Incentive Match Plan for Employees of Small Employers, which is an option for small companies with up to 100 employees. This IRA is funded not only by you but also by employee contributions. As the employer, you may choose to match your employees’ contributions up to a certain amount, or you may choose to contribute 2% of each employee’s compensation for each year. The simple IRA’s beauty is that it requires far less paperwork than a 401(k) does.

5. Defined Benefit Plan‍

If you put a premium on your financial comfort during your retirement years, and you have plenty of money to invest now, the defined benefit plan may be the right choice for you. The personal defined benefit plan can be used for the self-employed and small businesses with five or fewer employees. Contribution limits are approximately five times higher than a 401(k), and contributions are usually tax-deductible. Only the employer will fund the plan, and benefits are determined based on salary and tenure. Upon retirement, individuals will receive a comfortable monthly annuity.

Choosing from the Many Small Business Retirement Plans for Yourself‍

Couple discussing their retirement plan

Each of these six retirement plan options will give you a great way to save some money and prepare for retirement. However, finding the right plan may not be as easy as it initially seems. There are many factors to consider, including your business’s size, the amount of money you want to save every year, the needs your employees have, and your personal financial goals.

The Size of Your Business‍

Specific retirement plans are designed for certain sizes of businesses. For example, if you are a sole proprietor and do not have any employees, you may want to consider the solo 401(k) plan. However, if you have 20 or fewer employees, the SEP-IRA or the Simple IRA may work better. To use a traditional 401(k), you will need to have at least 20 employees.

The Amount of Money You Want to Save‍

Suppose your business is doing very well. You want to save a considerable amount every year or start your retirement savings late and need to save a significant amount quickly. In that case, you will want to consider a 401(k) rather than a traditional IRA or Roth IRA. Although IRAs have higher contribution limits for individuals over a certain age, a solo 401(k) lets you contribute over nine times as much, fast-tracking your retirement accounts.

Your Employees’ Needs‍

You will want to ensure that the retirement plan you choose meshes with your employees’ needs and goals. Retirement savings and employer contributions are enormous benefits that can make the difference between happy employees and high turnover.

Your Personal Financial Goals‍

Woman with money in hand thinking of her financial goals

Most importantly, you will need to consider your personal financial goals. Financial planning can look completely different between small business owners. Your most important concern should be how prepared you are for your future and how well your retirement account will let you access the funds you need later in life. Consider early withdrawal options and penalties along with the range of investments in your portfolio to ensure that you are confident in your financial foundation, and be sure to check with investment management professionals if you are unsure what to do.

Even if you have no plans to retire for several decades or think that you may want to continue working long into your retirement years, start planning for your future now with a small business retirement option that works for you. Helping your small business succeed requires a great deal of planning and attention to detail. Whether you are considering a website design, product creation, or financial planning, E-Marketing Associates can help you with all types of business e-marketing needs to lower your stress and help you get a better handle on your business. Our goal is to help you make your business as successful as possible so that you can experience fulfilling work and a promising future.

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