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    Retirement Savings Options for Small Business Owners

    Owning your own business is exciting, rewarding, and hopefully lucrative. One potential challenge for small business owners is to put a plan in place to begin building their own retirement savings. Then, tack on the difficulty in matching employee benefits offered by large companies and you can have some big shoes to fill.

    Retirement plans, in particular, can often suffer in small businesses. According to a TD Ameritrade survey of self-employed Americans, 55% are behind in saving for retirement, by about $335,000 per person. That's a $1.7 trillion shortfall just for self-employed baby boomers!

    With everything else required for your business, you may have been putting off setting up a retirement fund. Fortunately, there are a number of fund options that can start you saving very quickly and easily, with few or no fees. In addition to providing for your own retirement needs, many of these funds provide an easy way for you to contribute to employees' retirement, which will help your business stay competitive in hiring and retaining employees.

    Options for your own retirement

    If you have no employees and only your own retirement to consider, you have several good options. You may be surprised to hear one of them allows you to save much more than you ever could as an employee. 

    Standard IRA or Roth IRA

    Like most Americans, self-employed individuals are able to save up to $5,500 per year ($6,500 for those age 50 and older) of earned income in an individual retirement account (IRA) or Roth IRA. 

    • With an IRA, you contribute pre-tax dollars and pay tax when you withdraw the funds in retirement. You can set up an IRA to payroll deduct your pre-tax earnings.

    • With a Roth IRA, you contribute after-tax dollars, and you withdraw funds tax-free in retirement. The IRS imposes some income restrictions on Roth IRA usage.

    Solo/one-participant 401(k)

    If you really want to fast track your savings, a solo 401(k) is your best bet. With a solo 401(k), you can contribute funds as both the employee and the employer. 

    • Contribute up to $18,000 ($24,000 for those age 50+) of earned income as your employee contribution. This contribution may be pre- or after-tax but cannot exceed your actual compensation.

    • Contribute up to 25% of your business' net earnings as the business' profit sharing contribution.

    • Total contributions must not exceed $53,000 in a year ($59,000 for those age 50 and older).

    • A solo 401(k) lets you decide, year to year, the contribution amount that fits your business' budget. If you have a great year, you can make the most of it by stashing away a large amount for your retirement. If business slows the next year, you can reduce your contributions accordingly.

    • Though experts advise against taking a loan from any 401(k) fund, many solo 401(k) accounts offer you the option to borrow money, which can provide some peace of mind if your business falls on hard times.

    • The $18,000 employee contribution limit applies per person per year, which means if you had another job at any point during the year, you must make sure all your employee contributions don't exceed that limit.

    • Unless you wish to be extremely generous to any future employees, use a solo 401(k) only if your business is a one-person venture. If you add even one employee age 21+ who works for your business at least 1,000 hours per year, you would have to create a 401(k) account for that employee and fund it the same way.

    Options for owners and employees of small businesses

    Offering retirement funds and company contributions to employees is a great way to stay competitive in the job market. Here are some options designed to make retirement account creation and funding easy for small businesses. As you set up your choice of accounts, don't forget to fund your own employee account!

    Simplified employee pension (SEP)

    An SEP offers an easy and low-fee way to provide retirement funds to employees.

    • You set up a SEP with a trustee or financial institution, which will open accounts for you and all other eligible employees. The trustee or bank takes care of all financial and reporting details.

    • Your business contributes to each employee's account. The contribution must be the same percentage of pay for every employee.

    • Annual contributions may be quite generous, capped at 25% of an employee's pay or $53,000, whichever is less.

    • Funds come from the business only—employees cannot contribute.

    • Like a solo 401(k), a SEP offers flexibility. Contribute more to each employee's account in good years; in lean years, you are not obligated to make any contribution at all.

    • Employees are fully vested in the funds immediately, and the accounts are theirs to keep.

    • Contributions made to employees' accounts are tax-deductible for your business.

    Savings incentive match plan for employees (SIMPLE IRA)

    The SIMPLE IRA is designed for businesses with 100 employees or less. 

    • To be eligible for a SIMPLE IRA, your business must not offer any other retirement plan.

    • Employees may choose to contribute a percentage of their pay to their accounts, similar to a standard employer 401(k); the business is obligated to contribute to all employees' accounts.

    • Employee contributions are capped at $12,500 per year ($15,500 per year for those age 50 and older).

    • The employer either must match employees' contributions by contributing up to 3% of employees' pay OR must contribute 2% of employee pay to every eligible employee account, regardless of whether the employee contributed.

    • Company contributions are tax deductible.

    The IRS can provide you with full rules for SEP plans and SIMPLE IRAs.

    While your to-do list can get overwhelming when you run a small business, saving for your future and helping employees do the same must be a priority. Luckily, with the plan options laid out above, you can get started with a minimum of effort and expense.

    More good news: as with many activities the U.S. government wishes to encourage, the IRS offers small business owners an incentive to set up retirement plans for employees. As long as you contribute to the retirement of at least one employee who is not highly compensated, you can claim a tax credit of up to $1,000 for fees involved in establishing and maintaining a new retirement plan. 

    Have additional tips or information about retirement plans for small businesses? Add a comment to let us know!

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