When you’re running a small business, it can be hard to imagine your next day off. Who even has time to think about retiring? But that day will come soon enough, and it’s best to start saving now so you can rest easy during your golden years. There are a number of retirement plans for small business owners to consider. Most can even help you lower your tax bill. In fact, adding money to these plans gets you an extra tax deduction. Here are four retirement plan options that cover you, the business owner.
1. Individual Retirement Account (IRA)
Perhaps the easiest way to save for retirement is through an individual retirement account (IRA). If you were saving for retirement before you started your business, there’s a good chance you already have an IRA. An IRA is a low-cost approach, as no-fee plans are available. You also don’t need to cover employees.
The downside is that an IRA has the lowest limit for adding money. For 2018, the IRS states you can only save up to $5,500 per year, or $6,500 if you’re age 50 or older. With other small business plans, you can sock away more.
2. Simplified Employee Pension (SEP) IRA
The Simplified Employee Pension (SEP) IRA is a turbocharged version of the regular IRA. You can save 25 percent of your earnings until you’ve contributed a maximum of $55,000 per year. You may be able to set up a SEP IRA for free.
This plan can be a headache if you have employees. Employees can’t put money from their salaries into a SEP IRA. Instead, you’re required to pay into this plan on their behalf. Whatever percentage you put into a SEP IRA contribution must also be made for your employees. This can get expensive fast especially as your workforce expands.
The good news is the SEP IRA gives you flexibility over when you add money. If you had a slow year, you can lower the percentage you add into the plan or skip contributing altogether.
3. SIMPLE IRA
With a SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, you can save 100 percent of your salary up to a maximum of $12,500 per year. Employees can add money out of their own paychecks into their SIMPLE IRAs. Like the SEP IRA, this plan also requires that you contribute money to employees. You can either give each employee 2 percent of their salary each year or match what they put into their plan each year, up to a maximum of 3 percent of their salary.
You have to make SIMPLE IRA contributions each year so there is less flexibility compared to a SEP IRA. Also, SIMPLE IRA plans can be expensive because of annual fees.
4. Solo 401(k)
When it comes to retirement plans for small business owners, the solo 401(k) can seem like the best of both worlds. It combines the saving options of both the SEP and the SIMPLE IRA. You can save 100 percent of your salary up to $18,500, or $24,500 (as a catch-up contribution) if you’re age 50 or older.
If you want to save more, you can save 25 percent of your total compensation until you’ve maxed out at $55,000 per year, the same as the SEP IRA contribution. Solo 401(k)s are low-cost and simple to run. Some brokers don’t charge a fee to set up an account. Once you have more than $250,000 in your account, you’ll need to file Form 5500-EZ each year with the IRS.
Keep in mind that the solo 401(k) is only available if all of your employees are also owners of the business. Otherwise, you’ll need to set up a regular 401(k) plan.
Retirement may be a faraway dream but it gets a little closer with each dollar you put aside. Before you know it, you’ll be that grandparent who buys the best toys, hitting the golf course in peace, or simply enjoying your front porch. Until then, it’s back to work!