Center for a Secure Retirement
Retirement Plans for Small-Business Owners and the Self-Employed

Retirement Plans for Small-Business Owners and the Self-Employed

As a small-business owner, you might not realize that you have options for retirement plans that help you and any employees you might have save for a comfortable retirement. Regardless of the path you take, you must first understand what's available to you. From there, you can prepare for the future.

Finding a retirement plan that works for your small business isn't a one-size-fits-all experience. Explore your options and see what type of small business retirement plan will best help you optimize your financial plans. Now, let's look at the most common retirement plans for small-business owners.

Solo 401(k)

The 401(k) is a common retirement investment vehicle. It's an employer-sponsored retirement plan that's a relatively standard benefit at many larger companies.

But you don't need to have a bunch of employees to have a 401(k). A solo or individual 401(k) is a retirement savings option for the self-employed — even if they're a company of one.

A solo 401(k) works just like a traditional 401(k). You can make pretax contributions to your plan. Your withdrawals — which you can take without penalty after you turn 59 1/2 — are taxed at your income level.

With a solo 401(k), you can contribute as an employee and an employer, though the IRS limits your contributions. You can contribute up to $19,500 as an employee in 2021. (That's the standard amount for a traditional 401(k), too.) You can also contribute up to 25% of your compensation as an employer, up to a maximum total contribution of $58,000. If you're over 50, the IRS lets you contribute an additional $6,500 in catch-up contributions, which bumps your maximum total contribution to $64,500.

Roth IRA

A Roth individual retirement account (IRA) is another standard retirement savings vehicle. You can open an IRA on your own, whether you're self-employed or work for someone.

A Roth IRA lets your contributions grow tax-free. Taxes are paid on your contributions when you contribute them, so when it comes time to retire, you can withdraw your funds without paying any additional taxes. With a few exceptions, you'll need to wait until you turn 59 1/2 to take out the funds to avoid early withdrawal penalties and taxes.

Though a Roth IRA offers a nice tax advantage, it also has a much lower contribution limit. For 2021, the IRS capped contributions at $6,000 for people under 50. If you're over 50, you can contribute an extra $1,000 in catch-up contributions, for a maximum of $7,000.

The IRS also sets income limits for Roth IRA contributions. If you're married, file jointly and make more than $198,000 a year, your maximum contribution amount will be lower than if you made less than $198,000. Same thing if you're a single filer and you make more than $125,000 per year.

For many, a Roth IRA is just one part of a broader plan to invest for retirement.

SEP IRA

A Simplified Employee Pension (SEP) IRA is another retirement account you can enroll in if you are self-employed or a small-business owner.

For a one-person SEP IRA, you'll need to do a little math to determine how much you can contribute each year. If you're self-employed in 2021, you can contribute 25% of your net earnings or up to $58,000, whichever is less. There are no catch-up contributions with SEP IRAs.

As with most other retirement savings plans, if you withdraw funds before you turn 59 1/2, you could incur penalties and taxes.

If you're considering offering a retirement plan to your employees, a SEP IRA has more flexibility than a SIMPLE 401(k) for small businesses. However, as the employer, you could fund your employee's SEP IRA as a set percentage of their income, up to 25% or $58,000 each year, per IRS contribution limits. Your contributions are tax-deductible, and they aren't required every year.

SIMPLE IRA

If you're self-employed or a small-business owner with fewer than 100 employees, you could offer a Savings Incentive Match Plan for Employees (SIMPLE) IRA. To qualify for the plan, your employees must have made at least $5,000 in the previous two years.

If you're a solo SIMPLE IRA contributor, you can save up to $13,500 of your net earnings into the plan in 2021, according to the IRS. If you're over 50, you can contribute an extra $3,000 every year.

If you offer a SIMPLE IRA to your employees, you have two contribution options. You could match up to 3% of each employee's earnings dollar for dollar, or you could contribute a straight 2% of each employee's wages. Unlike a SEP IRA, contributions are required each year.

Your contributions are tax-deductible, but withdrawals are taxed at your income level at the time of distribution. Withdrawals made before you turn 59 1/2, with some exceptions, are subject to taxes and penalties.

If you contribute to employee plans as an employer, the contributions are considered a business expense and are tax-deductible.

Should You Offer a Retirement Plan?

You have many retirement plans available to you that can help you take care of your retirement needs. But you might consider offering retirement plan options to your employees, too.

There are a few benefits to offering these plans.

  • They can help you attract employees. Many employers offer retirement savings plans as a benefit, so having that as an option can make your company more attractive to potential employees.
  • They can bring tax advantages. As an employer, you could benefit from tax breaks from tax-deductible employer contributions and for offering a plan.
  • They can help you get your retirement on the right track. It's never too early to start saving for retirement for both you and your employees. Having a plan in place helps get you a step closer.

Making the Best Choice for You and Your Business

As you explore your options, weigh the pros and cons of what's available to you. Talk to trusted financial and tax professionals, then decide how you want to approach your retirement plans as a small-business owner. The right decision is the one that makes the most sense for your long-term plans.

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