Retirement Planning for Small Business Owners

Owning a business is the dream of many Americans. However, relying solely on the sale of your business as a retirement plan poses significant risks. Segregating your business from your retirement savings may be necessary to help preserve your financial future.

Types of Plans

There are two main types of retirement plans: IRA-based and “qualified” plans. IRA-based plans include SEP and SIMPLE IRAs, while qualified plans encompass 401(k)s, profit-sharing, and defined benefits plans. Qualified plans are generally more complex as they must comply with Internal Revenue Code and ERISA requirements. This guide focuses on IRA-based plans.

Selecting the right plan involves considering factors such as tax treatment, contribution limits, costs, and the potential for employer contributions.

Simplified Employee Pension (SEP) Plan

A SEP allows you to set up an IRA for yourself and your eligible employees. It has low start-up costs and is simple to establish. You contribute a set percentage of pay for each employee, but contributions are not required every year, allowing for flexibility.

For 2024, your contributions for each employee are limited to the lesser of 25% of pay or $69,000 (up from $66,000 in 2023). Most employers, including self-employed individuals, can establish a SEP. The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and who earns $750 or more.

SIMPLE IRA and SIMPLE 401(k)

The SIMPLE IRA plan is available for businesses with 100 or fewer employees. These plans are easy to set up with low administrative costs. Employees can elect to make pre-tax contributions of up to $16,000 in 2024 (up from $15,500 in 2023, with an additional $3,500 catch-up contribution if age 50 or older).

Employers must either match employee contributions dollar for dollar up to 3% of each employee’s compensation or make a fixed contribution of 2% of compensation for each eligible employee. The 3% match can be reduced to 1% in any two out of five years.

Any employee who earned $5,000 or more in any two prior years, and who is expected to earn at least $5,000 in the current year, must be allowed to participate in the plan.

SIMPLE 401(k) plans are like SIMPLE IRAs but may also allow loans. Employees must be at least 21 years old to participate. Because SIMPLE 401(k)s are qualified plans, they are slightly more complicated to administer than SIMPLE IRAs.

Tax Benefits

All these plans offer tax-deferred growth for your investments. Beginning in 2023, these plans may accept Roth contributions, which provide tax-free growth and tax-free withdrawals in retirement.

By understanding the options available and selecting the appropriate plan, small business owners can help secure their financial future while offering valuable benefits to their employees.

Any opinions are those of Munn Gray & Associates and not necessarily those of Raymond James.