Overwhelmed by Retirement Plan Choices for Your Business?
Business owners working with their accountant to decide on a retirement plan.
Thinking about implementing a retirement plan for your business, but not sure which will work best? The best fit will depend on your goals, number of employees, and income. Let’s talk about some common retirement plan solutions and why you might choose it for your business.
1. Solo 401(k) Plan
Best for: Self-employed individuals or businesses with no employees (other than the owner and spouse).
Benefits:
2024 Contribution limits (up to $69,000, or $76,500 if over 50).
Contributions can be made both as an employer and an employee, maximizing tax-deferred savings.
Roth (after-tax) and traditional (pre-tax) are allowed.
Many plans allow you to roll old retirement accounts into the plan, which may be beneficial if you are planning Roth conversions in the future.
Considerations:
Once you hire an employee, you will no longer be able to contribute to this plan.
Once the account balance is over $250k, you will need to file an annual form 5500 each year.
2. SIMPLE IRA (Savings Incentive Match Plan for Employees)
Best for: Small businesses with 100 or fewer employees.
Benefits:
Easy to set up and administer.
Lower administrative costs compared to 401(k)s.
Employer matches up to 3% of employee compensation or contributes 2% of compensation regardless of employee contributions.
Considerations:
Lower contribution limits than a 401(k) (up to $16,000 in 2024, plus $3,500 catch-up for those over 50). Employers must make mandatory contributions, limiting flexibility.
Participants must keep their contributions in the plan for two years or pay a 25% penalty for moving the account instead of the 10% penalty for other retirement accounts.
Rollovers, including rolling to another SIMPLE IRA are not allowed until after two years.
3. SEP IRA (Simplified Employee Pension)
Best for: Self-employed individuals and small businesses, especially those without employees or with few employees.
Benefits:
Simple setup and low administrative burden.
High contribution limits (up to 25% of compensation, up to $69,000 in 2024).
Contributions are made only by the employer, with flexibility on contribution amounts each year.
Contributions can be made up until timely filing your business tax return including extensions.
Considerations: Employer contributions must be the same percentage for all employees, which could be costly if you have a larger workforce.
4. Traditional 401(k) Plan
Best for: Small to large businesses seeking a flexible plan that allows for high employee and employer contributions.
Benefits:
High contribution limits (up to $23,000, with a $7,500 catch-up for those over 50 in 2024).
Option for employer match or profit-sharing.
Roth 401(k) options allow for tax-free growth on after-tax contributions.
Can add a cash balance plan to save more for business owners.
Considerations: Requires more administrative work and costs compared to simpler plans like SIMPLE IRAs or SEP IRAs. However, third-party administrators can manage these aspects.
5. Safe Harbor 401(k) Plan
Best for: Businesses that want to avoid annual nondiscrimination testing (a test that ensures highly compensated employees aren’t contributing disproportionately more than lower-income employees).
Benefits:
Same high contribution limits as a traditional 401(k).
Mandatory employer contributions (either matching or non-elective) ensure compliance with IRS testing rules, which simplifies administration.
Attracts and retains employees with guaranteed employer contributions.
Considerations: Employers must contribute regardless of profitability. Higher costs and less flexibility than a traditional 401(k).
6. Profit-Sharing Plan
Best for: Businesses with fluctuating profits that want flexibility in how much they contribute to employees’ retirement accounts.
Benefits:
Flexible employer contributions based on the profitability of the business.
Can be combined with a 401(k) for higher total contributions.
Contributions are tax-deductible for the business.
Considerations: Requires more complex administration and can be costly to fund in profitable years.
7. Cash Balance Pension Plan
Best for: Established businesses with high, stable income or owners seeking to maximize retirement savings beyond 401(k) limits.
Benefits:
Allows for much higher contribution limits than 401(k)s and IRAs, especially for older business owners.
Contributions are tax-deductible, reducing taxable income.
Guaranteed benefit at retirement provides stability for owners and participating employees.
Considerations:
Setup fees
Annual administrative costs for record keeping
Required annual contributions based on actuarial calculations
Considerations for Choosing the Right Retirement Plan for Your Business:
Size and Structure of Your Business
If you have employees, some plans are not available (Solo 401k) or may be more expensive to implement like a SEP IRA.
Profitability and Cash Flow
If you want flexibility in contributions (especially in years with varying profits), a Profit-Sharing Plan or SEP IRA might be the best option. However, if your business is profitable and can commit to fixed contributions, a Safe Harbor 401(k) or a Safe Harbor 401k with a Cash Balance Plan might offer better benefits for both the business owner and the employees.
Owner’s Retirement Goals
If you're a business owner close to retirement and need to maximize contributions, consider a Cash Balance Plan as it allows for larger contributions. For younger owners or those just starting out, a Solo 401(k) or Traditional 401(k) might provide enough savings and easier to fund year to year.
Administrative Costs and Complexity
Some plans (like 401(k)s and Cash Balance Plans) require more complex administration, including IRS filings and actuarial work. Others, like SIMPLE IRAs and SEP IRAs, are easy to set up and manage.
Employee Retention and Benefits
If you want to attract and retain employees, a Safe Harbor 401(k) or Profit-Sharing Plan can provide competitive retirement benefits. If your focus is on offering a basic but beneficial retirement option, a SIMPLE IRA may be sufficient.
As a business owner or self-employed individual, a Solo 401(k) or SEP IRA might be the easiest, most cost-effective way to save for retirement while also reducing your tax liability for the year. For businesses with employees, a Safe Harbor 401(k) offers a balance of higher contribution limits and simplified compliance. If you have significant profits and want to maximize savings, especially if you're nearing retirement or would like to retire early, a Cash Balance Plan could be a powerful option.
At Clear Insight Wealth Management, we help you understand and implement these strategies. If you’re ready to reduce your tax liability and increase your savings, we’d love to hear from you. To schedule a “Get to Know You” meeting email becky@myciwm.com, or schedule online.
About Becky
Becky Meats is a Certified Public Accountant and partner at Clear Insight Wealth Management, a wealth management firm for military families, government employees, and small business owners looking for a clear path to living their best lives. A firm believer that money is a tool that allows us to make our dreams happen, Becky thrives off simplifying clients’ finances and helping them find financial success. Becky has the rare talent of making the seemingly complex and chaotic world of finances and taxes simple and understandable. This understanding allows clients to make better use of their financial tools, often leading to success in many other parts of their lives.
Becky obtained her bachelor’s degree from Washington State University and has over 16 years of experience in accounting. She is a Certified Public Accountant (CPA) and Personal Financial Specialist (PFS). Her expertise is critical in integrating all the aspects of financial planning into a comprehensive whole.
Becky and her family live on a small farm with their registered Jersey cows and flock of unruly chickens. When she’s not poring over tax code, she can be found chasing cows out of her garden or lacing up her running shoes and going for a training run. An avid runner, she’s working toward the goal of running a race in every state (6 down, 44 to go). Despite a busy schedule, Becky dedicates her time to the local community. She is active in her local grange and corrals the Junior and Youth grangers at the local county fair (a significantly more difficult challenge than the livestock). To learn more about Becky, connect with her on LinkedIn.