Retirement Savings Options For Your Small Business

When it comes to small business ownership, retirement planning often takes a backseat to the daily grind of running the business. Between managing employees, overseeing operations, and focusing on growth, thinking about retirement might not seem urgent. However, the earlier retirement savings options are set up, the better it is for both business owners and their employees. Fortunately, there are a variety of retirement savings options that can be customized to fit the needs of a small business. 

401(k) Plans

The 401(k) is probably one of the most recognized retirement plans out there, and for good reason. It lets employees part of their salary to a retirement account, and then those contributions typically being tax-deferred. 

Not only can employees contribute to their accounts, but business owners have the option to contribute as well. This can be done either through matching contributions or by adding profit-sharing elements.

Of course, the 401(k) plan isn’t exactly free from hassle. There’s a bit more paperwork involved compared to some other options, and it can require more hands-on management. But for businesses that are looking to offer a strong retirement benefit, the 401(k) is definitely worth considering.

Solo 401(k)

For business owners who are flying solo, a Solo 401(k) is a perfect fit. As the name suggests, this plan is tailored for business owners with no employees, though it can also include a spouse who works for the business. The beauty of the Solo 401(k) lies in its flexibility. The business owner can contribute to the plan as both the employer and the employee, which allows for higher contribution limits compared to individual retirement accounts.

While it may sound like it’s only for those without employees, a Solo 401(k) is a great option for anyone looking to maximize their retirement savings in a straightforward manner. The paperwork is still more than an IRA, but it’s definitely easier than setting up a full-fledged 401(k) for a larger team. If the business expands and hires employees, the Solo 401(k) would need to be converted to a traditional 401(k) plan, which might involve more administrative work.

SEP IRA (Simplified Employee Pension)

When it comes to simplicity, the SEP IRA is hard to beat. This plan is designed for small businesses and self-employed individuals, and it offers much of the flexibility and tax-deferred growth seen with larger retirement plans but without all the complexity. With a SEP IRA, only the employer contributes to the plan, which means that employees do not have the ability to contribute from their own salaries.

The SEP IRA allows employers to make contributions based on a percentage of each employee’s compensation. The good news is that employers are not required to make contributions every year, which makes it a great option for businesses that may experience fluctuations in revenue. If the business has a good year, the owner can make larger contributions; if things are tight, they don’t have to contribute at all.

This flexibility is one of the main draws of the SEP IRA. However, it’s important to note that employees cannot contribute to the account, which could be seen as a downside for those who want to increase their retirement savings on their own. Still, for businesses that want a low-maintenance, cost-effective option, the SEP IRA is worth considering.

SIMPLE IRA (Savings Incentive Match Plan for Employees)

The SIMPLE IRA is a great choice for businesses with fewer than 100 employees. It’s straightforward to set up and maintain, and it’s less expensive than a 401(k) plan. Both employers and employees can contribute to the plan, but the employer must match employee contributions up to a certain percentage or provide a flat contribution. This setup makes it a great option for small businesses that want to encourage employees to save for retirement but can’t afford to offer the same level of contributions as larger companies.

The SIMPLE IRA allows employees to contribute a portion of their income to the plan, with the contributions being tax-deferred until retirement. For employers, the matching requirement is fairly low, making it an affordable way to offer a retirement benefit. The only downside is that the contribution limits are lower than those of a 401(k), so employees who want to save more for retirement may be limited by this option.

Profit Sharing Plans

Profit-sharing plans offer another way to help employees save for retirement, and they can be used in conjunction with other retirement plans, like a 401(k) or a SEP IRA. With a profit-sharing plan, employers make contributions based on the company's profitability. This means that if the business does well in a given year, employees get a little extra in their retirement accounts.

This type of plan is especially attractive for business owners who want to reward employees based on the company's success. The contribution amounts are flexible, so during lean years, the employer doesn’t have to make a contribution at all. However, when the business is doing well, it can be a way to share that success with employees.

IRAs (Individual Retirement Accounts)

For business owners who want to keep things simple or those who don’t want to mess with setting up an employee retirement plan, IRAs (both traditional and Roth) are a great alternative. Business owners can even use them to save for their own retirement.

With a traditional IRA, contributions are made with pre-tax dollars, and the money grows tax-deferred. When it’s time to retire, the money will be taxed as income. On the other hand, with a Roth IRA, contributions are made with after-tax dollars, but withdrawals in retirement are tax-free. The catch with Roth IRAs is that they come with income restrictions, so be sure to know what that is. Your CPA can help with that.

Setting up a retirement savings plan doesn’t have to be complicated, but it’s something every small business owner should think about. Whether it’s a 401(k), SEP IRA, SIMPLE IRA, or one of the other available options, providing retirement savings for both the business owner and employees is essential for long-term success. With the right plan, a small business can not only attract top talent but also help ensure that everyone has a secure and comfortable retirement down the road.

by Kate Supino