The Perfect Strategy for Small Business Retirement

If you’re a small business owner, chances are you’re so focused on your bottom line you haven’t had a lot of time to plan for the road ahead. Studies show that up to 40% of small business entrepreneurs haven’t even begun investing for their retirement!

Unlike people who work for corporations, an independent entrepreneur can’t just sign up for their corporate retirement account and sit back; they have to do the work themselves to get their retirement savings going. Luckily, there are a wide range of retirement plan options for employer and employee alike to choose from.

Each of the small business retirement plans we’re going to discuss will allow you to reduce your taxable income as well as grow your investments without paying taxes, until you reach retirement. Combined with investments such as CDs, profit sharing and mutual funds, you can customize the perfect strategy for you and your company.

So, let’s dive in! Here are several options designed for small business owners that make it easy for you to start planning ahead.

Simplified Employee Pension Plan (SEP IRA)

The SEP IRA is super simple to administer and is funded with tax-deductible contributions from employers or self-employed sole proprietors. This is a good plan for people whose income fluctuates month-to-month or year-to-year, because it allows you to increase or decrease (or even skip) contributions depending on your changing financial circumstances.

Your retirement investments will enjoy tax-free interest earnings, until the time when you retire and access the money. However, if you need to withdraw money from your SEP before retirement or the age of 59 1/2, you will be subject to a 10% penalty fee.

If you have employees working for you that also want to participate in a plan and make contributions to their own account, this plan won’t be a good fit, as it only allows contributions to be made by an employer or a self-employed individual.

Additionally, if you’d like to capitalize on tax savings by making tax-deductible contributions as both an employee and an employer, this plan doesn’t have that option.

  • Contribution limits: Either 25% of your net earnings from self-employment, or $52,000 in total contributions, whichever is lower.
  • Deadline: A SEP has a flexible deadline; you can open and fund a SEP up until your tax-filing deadline.

The Savings Incentive Match Plan for Employees (SIMPLE IRA)

The SIMPLE IRA is a good fit for many small business owners who have enough regularity with their income that they can make mandatory monthly contributions to their retirement account, as well as to employee accounts, on a regular basis.

The benefit of the SIMPLE IRA over the SEP is that you can make contributions as both an employee and an employer. You'll enjoy the tax-free benefits that come from making these investments both as an individual investor and as a business writing-off the expense from your taxes.

The set up and operations for SIMPLE are a little more complicated than SEP, because of the mandatory contributions, but both these plans do not require you to file financial reports with the government, and don’t have the administrative and regulatory requirements of 401(k) plans.

You probably don't want to select this plan if you have 100 employees working for you and you are not able to contribute every year to their retirement account. On the other hand, if you are a sole proprietor, the two-sided tax advantages of this plan may make it a great choice for you.

  • Contribution limits: An employee contribution up to $12,000, ($14,500 if you are 50+), plus an employer contribution equal to 3% of your self-employment net earnings.
  • Deadlines: Open a SIMPLE by October 1st in order to get the deduction for the next tax filing.

Self Employed 401k (Solo 401k plan)

The self-employed 401(k) is a little more complicated than the SEP and SIMPLE. It usually involves higher fees, more set-up time and extra paperwork when filing taxes, but in certain circumstances this plan may be an advantage for the self-employed or sole proprietor.

The plan only fits for those small business owners who have no other employees working for them other than a spouse. The self-employed 401(k) is not available to entrepreneurs who also maintain a staff of regular employees.

Like the SEP, the Solo 401(k) does not require mandatory contributions and the cap on annual contributions is $52,000 a year. But with the solo 401(k) contributions limits are structured differently, and are made by both employee and employer. Depending on your income in many cases this structure allows a sole proprietor to contribute more annually than either the SEP or SIMPLE.

  • Contribution limits:An employee contribution of up to $17,500 ($23,000 if you are 50+), plus an employer contribution of 25% of your self-employment earnings. The annual total limit for the contribution is $52,000.
  • Deadlines: For eligibility, you must establish your plan by December 31st and fund it by April 15th.

If you have any questions, take the time to speak with someone at your financial institution. Be careful to note the deadline for each option in order to capitalize on tax savings during the current fiscal year

Entrepreneurs love a good challenge — so challenge yourself to save more for your future. Get into the savings spirit!


The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.