Learn about the types of accounts that business owners can use to save for retirement.
What options are available for business owners to save for retirement?
Congratulations! Your business has grown to the point where you’re ready to think about saving for retirement. (Read more about why it’s important to save for retirement outside of your business.)
Saving for your retirement as a business owner can be complicated due to the many rules associated with how to save. But there’s a fit for your business so don’t get discouraged. A few things should be evaluated first:
- Does your business have any employees now or plan to have any in the future? This means workers for whom you issue a W2 tax form at the end of the year, and does not include contractors who have free will to work the hours they want and receive a 1099 tax form from you.
- How is your business organized? Is the business operating as a sole proprietorship (meaning you record all business income on your personal tax return)? Is your business entity an LLC or corporation or filing as a S-Corp?
- How much income do you expect to have available this year that can be set aside for retirement?
Retirement savings for business owners
Now that you can answer those basic questions above, it’s time to evaluate the available options.
This calculator can provide some general retirement savings estimates based on how your business is organized, whether you have employees, and how much income you expect to earn from the business. (Note this is an estimator only; please contact your tax provider of financial professional for details on your situation.)
Retirement Plan Options
Below is summary of different types of accounts that could be used for business owner retirement savings. Check with your financial professionals on your specific situation; not intended as personalized advice.
Traditional IRA or Roth IRA
What is it: IRA stands for Individual Retirement Account. This account is not just for business owners. A Roth IRA is for after-tax contributions, while an IRA is for pretax contributions. In most cases, you must have earned income from a job in order to contribute (exception is a spouse of an employed person). There are income limitations, meaning not everyone is qualified to contribute. The phaseouts are based on your tax filing status and income level.
Maximum contribution amount: For 2023, the maximum contribution amount is $6,500 (or $7,500 for age 50+) but it’s based on income thresholds. Read more about IRA deduction limits here and Roth IRA phaesouts here.
Could be a good fit for: Business owner just starting out with income below the thresholds (for example in 2023 for Roth IRA, single filer earning less than $138,000 or married filer earning less than $218,000) with about $6,500 or less available to contribute towards retirement.
What is it: SIMPLE stands for Savings Incentive Match Plan for Employees. Employees and employers can contribute. Employers are required to contribute either a) matching contribution up to 3% of compensation, or b) 2% nonelective contribution for each employee.
Maximum contribution amount: Employers are required to contribute for their employees (either a 3% match or 2% nonelective contribution). In addition, employees can contribute up to $15,500 in 2023 (or $19,000 for age 50+).
Could be a good fit for: Small business owners with just a few employees, who want to make contributions toward retirement for their employees and themselves but don’t want the added paperwork of setting up a 401k.
Learn more about SIMPLE IRAs.
What is it: SEP stands for Simplified Employee Pension Plan. Only employers contribute. There are no startup costs, and operating costs are very low compared to other more complicated plans like 401ks.
Maximum contribution amount: 25% of employee’s pay, up to $66,000 in 2023. For business owners whose business files taxes as an s-corporation, only your W2 wages are factored in, not profits.
Could be a good fit for: Business owners who have no employees and high income. This type of plan works for self employed (those operating as a sole proprietorship) and for LLCs or other organizational structures.
Learn more about SEP IRAs.
What is it: A 401k is so called due to the part of the tax code that established qualified profit sharing plans that allow employees to contribute a portion of their wages to individual retirement accounts. Employers can also contribute. Employee contributions can be pretax or after tax (Roth election). Employer contributions must be pretax.
Maximum contribution amount: Employees can contribute up to $22,500 ($30,000 for age 50+). For employers, if they contribute to their own account and employee’s accounts, there is a complicated set of rules to define the amount they can contribute. But the maximum allowed for any individual is $66,000 per year in 2023.
Could be a good fit for: Individual (solo) 401ks are established for business owners who have no employees. These can be a good fit for business owners who have the cash to contribute for themselves – both as an employee and as an employer, potentially up to $66,000 in 2023. For individual 401ks, the way to calculate the employer contribution is virtually the same as how to contribute a SEP IRA employer contribution. So individual 401ks can be a good choice for a business owner who is able to contribute more than just the 25% employer contribution allowed with a SEP IRA.
Learn more about 401ks.
In short, it’s complicated!
As you can see, there are many complicating factors that impact what type of retirement plan might be best for any business owner. But don’t let this hold you back from saving for retirement. Since there are so many options, there will be a good fit for you and your business, whatever your circumstances are.
Contact the financial professionals in your life to learn more about what’s best for your individual situation.