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Small Business Retirement Accounts

Work for yourself? Own a small business? There are specialized accounts to help you save for retirement.

Our Two Cents

If money is tight when you're first starting a business, start small with your saving and gradually increase the percentage you contribute. That way, you can ease your way up to your ideal amount.

Whether you work for yourself or have a small business with just a few employees, you can maximize your retirement savings and tax advantages with a small-business retirement plan. Setting up a retirement plan can help you and any employees. If you don’t yet have a plan, you probably should think seriously about starting one. As a small business, there are many retirement plans to choose from. The one best-suited to your situation depends in large part on what your company can afford.

This article provides a brief overview of the major types of retirement plans for small businesses or self-employed workers. It’s a good idea to talk to a tax advisor for help in choosing the plan that’s right for you and your business.

Individual 401(k)—For self-employed individuals without employees

An Individual 401(k) is an easy-to-administer, low-cost retirement plan designed for self-employed individuals and owner-only businesses who want to make substantial contributions toward their retirement. You direct how the contributions are invested. By wearing two hats, you are eligible to make substantial contributions as both employer and employee. Individual 401(k)s offer some of the highest contribution limits.

SEP-IRA—For either self-employed individuals or small businesses with employees

SEP IRAs are easier to administer than an Individual 401(k). A SEP-IRA allows you to make sizable contributions for yourself and any eligible employees. You have the flexibility to vary contributions from year to year or even skip contributions altogether in any year. When you do contribute, you must contribute the same percentage of compensation to the SEP-IRAs of any employees.

SIMPLE IRA—For business owners with employees

A SIMPLE IRA provides an easy and economical way to establish a retirement program for you and up to 100 employees. Each eligible employee can decide whether or not to participate and how much to contribute. Employer contributions are mandatory by offering a match to employee contributions or making automatic contributions to employee accounts. Contribution limits to a SIMPLE IRA are the lowest compared to all other small business plans. Employers can choose to make a 2% retirement account contribution to all employees or an optional matching contribution of up to 3%.

Personal Defined Benefit Plan—For older business owners with few or no employees

A Personal Defined Benefit Plan may be best for professionals age 50 or over who can make annual contributions of $90,000 or more for at least five years and who have few, if any, employees. It’s for people who are looking for a quick way to increase their retirement assets, most likely highly compensated business owners, partners, and key employees who are in their peak earning years. The business needs to be stable to allow substantial and regular contributions for several years with this type of plan. Contribution limits can be substantially higher than an Individual 401(k). Unlike the plans above, you don’t have specific control of the underlying investments. At retirement, you and other plan participants may receive your benefit payout in the form of a lifetime payout in addition to rolling assets into an IRA or receiving a lump-sum distribution. These plans are the most complex and expensive to set up and maintain.

Small Business Retirement Plans
Plan type Individual 401(k) SEP IRA SIMPLE IRA Personal Defined Benefit Plan
Best for Owner-employee with no employees Owner-employee or with just a few employees Any employer with 100 or fewer employees Older owner-only business or with just a few employees
Contribution Limits High High Low Very High
Ease to set up and maintain plan Medium Medium High Very Low
Contributions Owner can make contributions as employer and employee

An employer can make additional contributions, including matching contributions as set by plan terms
Employer contributions only

Employer can decide whether to make contributions year-to-year
Employee can decide how much to contribute

Employer must make 3% matching contributions or contribute 2% of each employee’s compensation
Employer generally required to make contributions as set by plan terms

An actuary must determine annual contributions
Key Features Higher potential contribution limits than SEP-IRA and SIMPLE IRAs

Employee salary reduction contributions are immediately 100% vested
High contributions for you

A way to contribute to qualified employees’ accounts

Contributions for employees vest immediately
A way to contribute to your own retirement easily and regularly and help employees contribute to theirs

A low-cost plan funded mainly by employees

Contributions for employees vest immediately
Highest contribution limits compared to all other plans

Predetermined benefit at retirement

The information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner, or investment manager.

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