Top 5 Retirement Accounts Available to Small Company Owners

It’s no secret that hard work never ends, whether you’ve been operating your own firm for years or are just starting out. This also applies to retirement planning, where success depends on starting early enough. Thankfully, there are a variety of tax-advantaged choices accessible, such as retirement plans that you may maximize for yourself and your staff. The ideal fit, however, will vary according on your unique situation, level of risk tolerance, and size of company. What you should know is as follows.

A financial advisor could help you establish a retirement plan if you are a business owner.

When it comes to retirement account setup, small business owners have a few choices to choose from. These possibilities are distinguished by variables such as the quantity of workers, contribution caps, investment options, and administrative needs. The best retirement plan for your company and personal financial objectives will therefore be determined in part by your tastes and circumstances. Here is a summary of the top five retirement accounts available to small company owners:

SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account)

Only small enterprises with less than 100 employees are eligible for SIMPLE IRAs. Employers and employees can both contribute to this simplified IRA.

All employees are required to enroll in SIMPLE IRAs. The employer must additionally provide matching payments to the plan in one of two ways: Up to 3% of each employee’s yearly salary, matching 100% of their donations is one method. Alternatively, independent of each employee’s contribution, you can donate 2% of each employee’s pay (up to $345, 000).

Thankfully, employer contributions are tax deductible, which may lessen small business owners’ financial obligations. Furthermore, depending on the owner’s preferences, SIMPLE IRAs can be either standard or Roth accounts, offering greater tax flexibility.

Compared to ordinary IRAs, SIMPLE IRAs have a larger contribution cap. In particular, owners and staff members are permitted to fund their accounts with $16,000 in 2024. An extra $3,500 in catch-up contributions is available to participants 50 years of age and above, for a total annual contribution of $19,500.

Finally, SIMPLE IRA startup costs may be covered by tax credits. Employers who have 50 workers or fewer are eligible to get a 100% credit for the expenses incurred in designing and overseeing the plan. In the case of enterprises employing 51 to 100 people, the credit drops to 50%. In addition, your company can be eligible for a $1,000 bonus credit for each employee to help defray the cost of matching contributions.

Simple Employee Pension Individual Retirement Accounts, or SEP IRAs

SEP IRAs and SIMPLE IRAs are similar in that they both provide a Roth option, tax-deductible contributions, simpler administration, and possible tax benefits. They do, however, differ significantly in a few key ways. Contributions, for instance, are made only by the employer. Furthermore, contributions are not required annually to keep the account open.

Additionally, SEP IRAs have a larger potential for savings. Entrepreneurs may set up as much as 25% of their yearly salary or $69,000, whichever is lower, for 2024.

Each worker must also contribute the same amount to their SEP IRA. For instance, the owner of the company must deposit 15% of each employee’s pay into their individual accounts provided they contribute 15% of their own salary to their account. Neither employers nor employees are permitted to make catch-up contributions.

Conventional IRA (Individual Retirement Account)

Any individual, even owners of small businesses, can open a standard individual retirement account (IRA). Employee contributions or participation are not required for this option. Rather, you choose to start the account on your own, make annual contributions, and choose between a regular and a Roth account.

Owners who would want less administrative labor than a company retirement plan can benefit from this type of arrangement. Nevertheless, the reduced contribution cap is a drawback. You have the option to fund your IRA with $7,000 for 2024. Plan participants 50 years of age and above can make $1,000 catch-up contributions; however, because of the low limit, it is preferable to use this tool with others to create a comprehensive investing strategy.

Solo 401(k)

There are also other variations of 401(k)s accessible. Only business owners who work with their spouse or without staff are eligible for the solo 401(k). Companies with any other configuration are not eligible. So, this account isn’t practical if you intend to hire staff in the future.

Solo 401(k)s offer greater savings potential than traditional 401(k)s because they have the same contribution limitations as SEP IRAs. In summary, the maximum amount is $69,000 in 2024, plus an extra $7,500 catch-up payment for individuals 50 years of age or above.

There is a Roth version of this retirement plan as well, which offers the possibility of making contributions after taxes.

Conventional 401(k)

Together with the business owner, employees can take part in a retirement plan through a traditional 401(k). The owner has the option to select between Roth and conventional versions and make matching contributions. Up to 25% of the total salary paid to employees may be deducted by owners from their taxes as matching contributions, and they may also claim tax credits for setup expenses.

The contribution caps for business owners in traditional 401(k)s are the same as those in solo 401(k)s; they are $69,000 for 2024, with an additional $7,500 for those 50 years of age or over.

However, this technique has drawbacks, such as increased administrative requirements. The plan benefits all employees equally thanks to the non-discrimination laws, yet determining whether it is fair can be costly and time-consuming.