The role of your business in retirement

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As a business owner, it's important to grow your business. But it’s also crucial to save outside of it. Someday you’ll want or need to retire. Without outside savings, you could face challenges if you don't get as much from the sale of your business as you were expecting.

To diversify your retirement strategy, consider an employer retirement plan. It can help you save outside your business while providing tax benefits.

Let’s look at some options.

Retirement plans for businesses without employees

SEP IRA
While any-sized business can establish a SEP IRA plan, it's most commonly used by self-employed individuals and businesses without employees. Key features include:

  • Only the employer can make contributions. Employee contributions are not permitted.
  • The employer is not required to make contributions or contribute the same amount each year. However, when contributions are made, the employer must contribute the same percentage of compensation for each eligible employee.
  • Contributions are tax deductible and grow tax deferred.
  • Easy to administer with relatively low costs.

Owner-only 401(k) 
This is a simplified 401(k) plan for a business with no employees other than the owner(s) and their spouse(s). Key features include: 

  • Both employer and employee contributions are permitted.
  • Annual contribution limits are higher than a SEP IRA for those 50 or older.
  • Contributions are deductible expenses for the business and can be made on a traditional or Roth basis.
  • You can borrow from your 401(k) account.
  • 401(k) accounts generally provide greater bankruptcy and litigation protection than a SEP IRA.
  • Generally more complex and costly to administer than a SEP IRA.

Owner-only defined plan
This plan is for business owners with no employees (other than their spouse) with relatively high, steady income who want to increase or maximize their contributions. Key features include:

  • Only the employer can make contributions. Employee contributions are not permitted.
  • The employer is required to contribute a calculated amount based on the amount needed to pay benefits under the plan. If the business contributes less than the calculated amount, the IRS could assess penalties and even disqualify the plan.
  • Annual contributions can be significantly higher than the 401(k) limits. This plan can also be paired with a 401(k) plan to save even more for retirement.
  • Contributions are tax deductible, and earnings are tax deferred until you withdraw the money.
  • You can borrow from your defined benefit plan.
  • Defined benefit plans generally provider greater bankruptcy and litigation protection than a SEP IRA.
  • Generally the most complex and costly to administer.

Retirement plans for businesses with employees

SEP IRA
While any-sized business can establish a SEP IRA plan, it's generally most appropriate for businesses with fewer than 10 employees. Key features include:

  • Only the employer can make contributions. Employee contributions are not permitted.
  • The employer is not required to make contributions each year or contribute the same amount each year. However, when contributions are made, the employer must contribute the same percentage of compensation for each eligible employee.
  • Contributions are tax deductible and grow tax deferred.
  • Easy to administer with relatively low costs.

SIMPLE IRA 
This plan is limited to businesses with 100 or fewer employees who have earned at least $5,000 the previous year. Key features include:

  • Both employer and employee contributions are permitted.
  • Employers must make an annual contribution of up to 3% of compensation for eligible employees.
  • Lowest contribution limits relative to other plan types.
  • Contributions are tax deductible and grow tax deferred.
  • Easy to administer with relatively low costs.

401(k) 
This plan type offers the most flexibility but can also come with additional costs and administrative responsibilities. Key features include:

  • Both employer and employee contributions are permitted.
  • Contribution limits are higher than SEP and SIMPLE IRA plans. However, the amount highly compensated employees can contribute, including business owners, is limited by how much all other employees contribute unless you establish a Safe Harbor 401(k). A Safe Harbor 401(k) requires minimum employer contributions of up to 5% of compensation for eligible employees.
  • Contributions are deductible expenses for the business and can be made on a traditional or Roth basis.
  • You can borrow from your 401(k) account.
  • 401(k) accounts generally provide greater bankruptcy and litigation protection than a SEP IRA.
  • Generally more complex and costly to administer than a SEP or SIMPLE IRA plan.

Are these retirement strategies right for you?

Everyone’s retirement goals are different. And planning for them can be more complex when you’re a business owner. At Edward Jones our financial advisors take the time to understand your unique situation and your vision for the future. Contact us for a no-obligation consultation.