There are many obstacles to go through as an entrepreneur. Navigating the waters of owning a business can be confusing and discouraging. When it comes to retirement, you might be wondering how that will work when you own a business. The rules are different for self-employed individuals than if you were employed by someone else. So, what retirement plans for entrepreneurs are best?
Types of Retirement Plans
We are going to be talking about 4 main types of retirements plans for entrepreneurs. There are other options out there, but these are the most common and will likely be what you choose from.
- SEP IRA
- Solo 401(k)
- Traditional or Roth IRA
- Simple IRA
All of these plans have different rules and benefits to them. While we will explain the pros and cons of each, we ultimately recommend that you work with a qualified tax professional and financial advisor when setting any of these plans up to ensure everything is done correctly and to your benefit.
A SEP IRA is an easy retirement plan to setup and requires a low level of maintenance through the years. With this plan, you can contribute whether you are a solo entrepreneur or if you have employees. There is no annual reporting to the IRS and no catch-up contributions available.
As the business owner, any contributions that you make toward your SEP IRA, you must also make that equal percentage toward each of your employees’ SEP IRA. This can add up quickly if you are trying to contribute a large sum or if you have a decent number of employees. Employees are not able to make contributions through salary deferral.
The Solo 401(k) is available to those who are self-employed and have no employees. The only exception to this is if you hire your spouse; they can then contribute to the plan. This will in turn increase your contribution limit, as they are able to add the standard employee contribution for the year, and you can add employer contributions on top of that. That gives the potential of 2x the tax savings. Catch-up contributions are available to those 50 or older.
Once you have more than $250,000 in your 401(k) account, you must file Form 5500 with the IRS every year. So make sure to keep an eye on your account and inform your accountant when it reaches that point.
For the most part, a Solo 401(k) is going to allow you to put away more money for retirement than a SEP IRA because a Solo 401(k) allows both employee and employer contributions.
Traditional or Roth IRA
A traditional or Roth IRA is likely the easiest way to get started with a retirement plan, especially if you are rolling over from a previous job you held. However, the contribution rates are much lower than the other options available to you. If you are 50 or older, you do have an extra catch-up contribution available.
You can deduct contributions to a traditional IRA from your personal taxes, but not for a Roth IRA. The benefit of the Roth IRA is the tax-free withdrawals once you reach retirement.
A simple IRA is available to self-employed individuals and employers with up to 100 employees. Extra catch-up is available as long as the age requirement is met. There is no annual reporting to the IRS required for a simple IRA.
Contributions made to the plan are tax deductible, but withdrawals are taxed in retirement. Any contributions that are made into employee accounts are able to be deducted on your taxes. Employees are able to contribute to the plan through salary deferral.
All of these plans are different, but all have their own benefits. Your specific situation will determine which one is best for you and your business. Like we mentioned above, it is very important to speak with your tax professional and a financial advisor when starting your retirement plan. They will be able to tell you more about the pros and cons of each.
If you are looking for experienced tax professionals to handle your business’ taxes and books, then CPA On Fire is what you are looking for. CPA On Fire team members have helped online entrepreneurs grow exponentially in their business for over 25 years. We take the intimidating aspect of running your business – your financials – and make sure everything is handled fully. Get freedom from accounting, tax, and regulatory and get scalable growth, peace of mind, and profit. Let’s connect and see what CPA On Fire can do for you.