3 Entrepreneur-Friendly Retirement Plans You Should Know

You don't have to have a big company to plan for your future.
Make sure you investigate all your retirement plan options before leaving some good opportunities on the table. (Photo: emilie zhang/Shutterstock)

Being an entrepreneur doesn’t mean giving up all the perks of corporate America. So maybe you’re springing for “Bagel Monday” all by yourself, but you can still have a real retirement plan. Several options are available for small businesses, in addition to Traditional and Roth IRAs for individuals.

These entrepreneur-­friendly retirement plans have been designed for ease and simplicity. They have advantages like higher contribution limits so you can save more, faster. And if you have employees or want to hire them someday, a real retirement plan can be a good way to attract and keep them.

Make sure you investigate all your retirement plan options before leaving some good opportunities on the table.

“Look at it this way,” New York State tax accountant Kerry Englander from Summit Tax Services said. “The more you put into a deferred retirement plan, the more you’re reducing your taxable income, paying less in federal tax and, in some cases, state tax, too. That means your take-­home could be the same as if you didn’t contribute to a plan.”

Take a look at this overview and make a date to discuss the full menu of alternatives with your financial advisor. As a baseline, remember that the annual contribution limit for a Traditional IRA or Roth IRA is $5,500 ($6,500 if you’re 50 or older).

Don’t be intimated about choices that are new to you.

“Many retirement plans for small businesses are essentially all the same,” Englander said. “They function for small business owners as deferred pension plans. Each one just has slightly different criteria in terms of contribution limits and number of employees.”

1. Solo (Individual) 401(k)

The Solo 401(k) is for self-­employed individuals or an individual who employs his or her spouse, but no other employees. It allows you and your spouse to each contribute up to $18,000 a year as employees ($24,000 if you’re 50 or older). It also allows you to contribute even more as an employer, up to 25 percent of your compensation. Your employer contributions are tax-deductible.

While the contribution limits are high, you’re not bound to them. You can decide to contribute less some years and more other years, based on how your business is doing. This type of plan does require an administrator, so consider those fees as you’re weighing this option.

2. SIMPLE (Savings Incentive Match Plan for Employees) IRA

The SIMPLE IRA is a streamlined plan without a third­-party administrator for small business owners who have employees, 100 or fewer. It gives you the option of either choosing one financial institution that all employees will use or allowing each employee to choose his or her own. Either way, employees pay any associated fees themselves.

You can contribute up to $12,500 a year to your account ($15,500 if you’re 50 or older). You also need to contribute a small percentage to your employees’ accounts, but these contributions can be taken out of employees’ salaries and are tax­-deductible. It’s important to know that with this plan, early withdrawal in the first two years, including rollover, comes at a high price, unless you are 59.5 or older. The penalty can be up to 25 percent. But the idea is to save for the long­-term, right?

3. Simplified Employee Pension (SEP) IRA

The SEP IRA requires a third-­party administrator, and it can be a good choice if you have a small number of employees. With this plan, you make all the contributions as an employer. Your employees aren’t required to make any contributions of any set percentage. But as with a Solo 401(k) and SIMPLE IRA, your employer contributions are tax-­deductible. And as with the Solo 401(k), the contributions limits for your account are at the highest range compared to other plans with a low level of complexity, up to 25 percent of your compensation.

Thoroughly vetting these and other small business retirement plan types may feel a little daunting at first, but the plans contain words like “solo” and “simple” for a reason. Once you get a handle on them, the pros, cons and processes will be easy for you to compare to Traditional and Roth IRAs. Maybe not as easy as signing up for a corporate plan someone else has selected, but as an entrepreneur, that’s not really your style, anyway.

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