Retirement Plans for Business Owners

When it comes to setting up a retirement savings plan for your small business, you will be faced with numerous different plan type options that you could implement. As the owner of the business, you must decide between these options to determine the best retirement plan for your specific business. Below is a summary of some of the pros and cons associated with each type of plan:

IRA-Based Plans:

Plan Type Pros Cons
Payroll Deduction IRA 路聽聽聽聽聽聽聽聽 Easy to set up & maintain

路聽聽聽聽聽聽聽聽 No set up costs

路聽聽聽聽聽聽聽聽 Eligibility requirements are easy to meet

路聽聽聽聽聽聽聽聽 Low annual contribution limits

路聽聽聽聽聽聽聽聽 No employer contributions allowed

SEP IRA 路聽聽聽聽聽聽聽聽 Easy to set up & maintain

路聽聽聽聽聽聽聽聽 Low cost

路聽聽聽聽聽聽聽聽 Employer contributions not required every year

路聽聽聽聽聽聽聽聽 No employee contributions allowed

路聽聽聽聽聽聽聽聽 Contributions limited to the lesser of 25% or $66,000 (2023 limit)

SIMPLE IRA 路聽聽聽聽聽聽聽聽 Easy to set up

路聽聽聽聽聽聽聽聽 Low cost

路聽聽聽聽聽聽聽聽 Employee contributions are pre-tax (which reduces income/taxes that year)

路聽聽聽聽聽聽聽聽 Employer contributions required each year

路聽聽聽聽聽聽聽聽 Employer contributions must be either 100% match of employee contributions (up to 3% of compensation) or a flat 2% of each employees compensation

 

Defined Contribution Plans:

Plan Type Pros Cons
Solo 401(k) 路聽聽聽聽聽聽聽聽 Roth contributions available

路聽聽聽聽聽聽聽聽 Contributions limit are the same as a traditional 401(k) 鈥 both on the employee and employer side

路聽聽聽聽聽聽聽聽 Only business owner and spouse can participate

路聽聽聽聽聽聽聽聽 Not allowed for businesses that have employees

Safe Harbor 401(k) 路聽聽聽聽聽聽聽聽 Roth contributions available

路聽聽聽聽聽聽聽聽 Annual nondiscrimination testing not required

路聽聽聽聽聽聽聽聽 Easier to maintain than traditional 401(k)s

路聽聽聽聽聽聽聽聽 Employers are required to make contributions each year

路聽聽聽聽聽聽聽聽 Employer contributions must be a specified match percentage of employee contributions or a flat 3% of each employees compensation

Traditional 401(k) 路聽聽聽聽聽聽聽聽 Roth contributions available

路聽聽聽聽聽聽聽聽 Permits high level of deferrals by employees

路聽聽聽聽聽聽聽聽 Employer contributions optional

路聽聽聽聽聽聽聽聽 Higher cost

路聽聽聽聽聽聽聽聽 Stricter testing and IRS requirements

 

As you can see, there are many options for retirement plans for your business. Depending on your business size, profitability, and cash flow, the right retirement plan options could differ.

 

For more details on each plan type, as well as more in-depth pros and cons, see the below 2 links.

  1. https://www.businessnewsdaily.com/7459-small-business-retirement-plans.html

2. https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/choosing-a-retirement-solution-for-your-small-business.pdf