Retirement Plans for Small Business Owners

Available Retirement Plan Options for Small Business Owners

Choosing from available retirement plan options for your small business can seem challenging. Which plan will work best for your needs? What happens if you hire employees in the future? What plan allows the type of investments you and your employees want to make? In this article, we’ll discuss the details and benefits associated with each plan. We’ll also offer comparisons to help you select the best plan for your small business.

Individual 401(k) Plan

An Individual(k) plan (Solo 401(k)), is a cost-effective retirement plan for small business owners with no employees (other than a spouse or partners). It also works for employees who can meet specific requirements (work less than 1,000 hours or are under 21). The types of businesses that can establish Solo(k) plans include sole proprietorships, partnerships, limited liability corporations (LLCs), and incorporated companies (including subchapter S-Corps).

Specific benefits associated with an Individual 401(k) plan include:

• 2023 Elective Deferral Limit of $22,500 and catch-up Contribution of $7,500
• Employer Contribution of 25% of compensation as defined by the plan.
• Maximum Contribution of $66,000
• Participants can borrow up to 50% of the account balance up to a maximum of $50,000
• As the Trustee of your plan, you can have checkbook control of your funds
• A brokerage account for the traditional portion of your asset is included with your plan, so you have the freedom to diversify the way you want
• This plan can invest into any investment the IRS doesn’t prohibit, including all of the investment classes commonly held within a self-directed IRA.

What Happens if You Add an Eligible Employee With a Solo(k) Plan?

If you add eligible employees in the future, you cannot continue to use an Individual(k) plan. In this situation, it would be better to go with a SIMPLE IRA.   Solo(k) plans are best for single business owners with high net income.

SEP IRA

Simplified Employee Pension (SEP) plans allow the self-employed, partners, or corporation owners a low-cost, easy way to provide retirement benefits for employees. Employers who can provide this plan include self-employed individuals or businesses that don’t currently maintain a retirement plan.

Specific benefits associated with a SEP IRA include:

• Contribution Limit of 25% of employee compensation
• $66,000 Maximum Contribution Limit for 20023
• You can make contributions up until the tax deadline of the following year
• Minimal start-up and facilitation fees
• RMDs (required minimum distributions) begin at age 73
• Existing IRA or employer-sponsored plan can rollover or transfer into self-direction
• Can invest in any permissible alternative asset to build retirement wealth

SIMPLE IRA

Savings Incentive Match Plan for Employees (SIMPLE) tailors to small businesses with fewer than 100 employees. Employees may choose to defer a pre-taxed portion of their compensation into the plan. Employees include self-employed individuals. Contribution limits for employees under 50 are $13,500 and $16,500 for those 50 and older. Employers can match this contribution by up to 3% of employee compensation.

Specific benefits associated with a SIMPLE IRA include:

• Contribution Limits for 2023 are: Under age 50: $15,500. Age 50 and older: $19,000
• Low start-up and facilitation costs
• RMDs (required minimum distributions) begin at age 73
• Employer match between 1%-3% of employee compensation (not required)
• Can invest in any permissible alternative asset to build retirement wealth

SEP IRA vs. Solo 401(k)

To better understand how these plans differ, let’s look at each plan through a small business owner’s or employee’s eyes.

Individual 401(k) Plan – Scenario

John is 48 years old and owns a small consulting company in which he is the only employee and does all the work. John’s yearly salary is $200,000 a year. As the business owner, John can make an elective deferral as the employer and as an employee. Let’s assume he would like to contribute as both employer and employee.

In an Individual 401(k), a yearly contribution consists of two sources. The first source is employee elective salary deferrals of up to $22,500. The second is the company’s match or employer profit-sharing contribution up to 25% of total compensation. The total of these two amounts cannot exceed $66,000 for individuals under age 50. With employee elective deferrals, John, as the employee, can elect to defer up to $22,500. Then, John, as the employer, can match up to the total limit of $38,500. This gives John the maximum contribution limit of $61,000.

SEP IRA – Scenario

Taylor’s Bakery is one person bakery that has a SEP Plan. Taylor makes $100,000 a year, reported on a W-2. 

Taylor can contribute up to 25% of his earnings into the SEP IRA. The contribution limit for 2023 for him would be $25,000. 

Contribution Considerations for Small Business Owners

Mitchell is 38 years old. He owns Paint By Numbers, a small painting business where he makes $100,000 and has no eligible employees. Here’s what his maximum contributions could be under each plan for 2023.

Individual 401(k): $47,500 ($22,500 plus employer match $25,000)

SEP IRA: $25,000

SIMPLE IRA: $15,500

To review Individual 401(k)s and retirement plans for small business owners further, check out our informational flyer.

If you would like to know more about the different types of available retirement plans for the self-employed, please visit www.midlandtrust.com or call us at (239) 333-1032. We’re here to help!

MIDLAND TRUST COMPANY, NOR ITS AFFILIATES OR SUBSIDIARIES (COLLECTIVELY REFERRED TO AS “MIDLAND”), IS NOT A FIDUCIARY: Midland’s role as the Custodian and/or Administrator of self-directed retirement accounts is non-discretionary and/or administrative. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account, and is responsible for conducting his/her own due diligence. Midland has no responsibility or involvement in selecting or evaluating any investment and does not conduct due diligence on any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.