What retirement plan is best for my business?
With so many different options, selecting a small business retirement plan that meets the needs of you and your business can be challenging on your own. Each available option offers different contribution limits, tax-saving incentives, fees, and filing requirements.
Our wealth managers can assist you in choosing the best retirement plans for a small business based on the specifics of your business model, financial positioning, and goals. Possible options for business retirement plans include:
Individual 401(k) plans/ Solo 401(k)
Individual 401(k) plans, also known as i401(k)s or Solo 401(k)s, are a great option for self-employed individuals or those with no common law employees including C corporations, S corporations, and limited liability companies (LLC’s). These accounts allow business partners to invest as both an employer and an employee with all the benefits of a traditional 401(k).
For investors making contributions as both an employer and employee, contributions cannot exceed $61,000 for the 2022 tax year or $67,500 if age 50 or older. There is no fee to establish an individual 401(k).
SEP-IRA (Simplified Employee Pension)
Simplified employee pension accounts are available for those who employ others, are self-employed, or who earn free-lance income.
SEP-IRAs allow employers to contribute up to 25% of the employee’s total compensation or up to 20% of income for the self-employed. Typically employers are the only ones that contribute to this type of small business retirement plan although employees are able to make contributions as well.
Simple IRAs (Savings Incentive Match Plan for Employees) allow both employers and employees alike to make tax-deferred contributions to their retirement accounts. This is an ideal option for businesses with less than 100 employees or individuals who are self-employed.
Offering Simple IRAs allows you as the business owner to choose between two options for the amount you wish to match. For the 2022 tax year, employers can offer either a dollar-for-dollar match of employee contributions up to 3% of each employee’s compensation or a contribution of 2% of each employee’s compensation. These contributions are tax-deductible at the end of every year. Employees can contribute up to $14,000 or $17,000 for employees age 50 and older.
Both the business and the employees can set themselves up for a successful retirement while tapping into end-of-the-year tax savings by utilizing a 401(k) plan. As mentioned above, individual or Solo 401(k)’s are an option for businesses without employees, but for small businesses that do employ other professionals, traditional 401(k)’s can be a better option. This is because they often offer more options in terms of investment choices and can help lower your income tax bill.
There is typically a management fee for traditional 401(k) accounts and they allow employees to make pre-tax contributions up to $20,500 or $27,000 if 50 or older for 2022.