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Common Retirement Plans For Small Business Owners

Updated: Jun 5, 2023

Your business owner clients have many options when establishing retirement plans. Several key factors, specific to each client’s unique situation, must be considered in order to select the appropriate plan or combination of plans.

To help differentiate between the most commonly adopted retirement plans, we have created this chart. You can use this guide when comparing plan options and discussing your client’s goals regarding:

  • Maximizing retirement savings

  • Incentivizing employees

  • Managing costs and administrative complexity

  • Optimizing income tax planning

To frame a comprehensive discussion with your business owner clients, consider pairing this with the “Common Pension Plans For Small Business Owners” guide.

In the face of economic struggles, market volatility, and the rapid pace of inflation, small business owners continue to be the backbone of our country. They not only contribute to the economy but also provide employment opportunities and help their employees achieve financial security. Retirement planning is a crucial aspect of ensuring a comfortable future for both business owners and their employees. In this article, we will delve into the world of small business retirement plans, discussing key factors to consider when selecting the appropriate plan. While we won't cover all the available options, we will focus on commonly used plans such as the solo 401(k), safe harbor 401(k), traditional 401(k) profit sharing plan, SIMPLE IRA, and SEP IRA.

Maximizing Retirement Savings:

One of the primary objectives of a retirement plan is to maximize savings for a secure future. The solo 401(k) is gaining popularity, especially among business owners and self-employed individuals without employees. With a solo 401(k), eligible individuals and their spouses can contribute up to $20,500 (for 2022) or 100% of earned income, whichever is less. What sets the solo 401(k) apart is that the employer has full discretion over contributing to the plan, making it an attractive option for those who want to optimize their retirement savings.

Incentivizing Employees:

Small business owners often seek ways to reward and motivate their employees. The safe harbor 401(k) plan is designed to simplify administration while ensuring employee participation. Eligible employees aged 21 and over, with at least one year of service and 100% vesting, can benefit from this plan. Employers have the option to either make a non-elective 3% contribution or match participant deferrals up to 4% of their compensation. Safe harbor plans are ideal for businesses that prioritize employee benefits and want to streamline compliance testing.

Managing Cost and Administrative Complexities:

For businesses concerned about cost and administrative complexities, traditional 401(k) plans and SIMPLE IRAs offer viable options. Traditional 401(k) plans provide employers with full discretion over contributions, making them flexible in times of economic uncertainty. On the other hand, SIMPLE IRAs are suitable for small businesses with fewer than 100 employees and allow for simplified administration. While these plans have their respective advantages, recent developments in the financial technology sector have made other options, such as solo 401(k) plans, more accessible and cost-effective.

Optimizing Tax Planning:

Tax planning is a critical consideration for small business owners, and certain retirement plans offer significant tax advantages. The SEP IRA and profit-sharing plans are attractive from a tax perspective. SEP IRAs are popular among small employers and self-employed individuals, allowing contributions up to 25% of compensation or $61,000 (for 2022). Profit-sharing plans, commonly utilized by small partnerships or corporations, enable employers to make discretionary contributions up to 25% of participants' compensation. These plans can serve as valuable tax planning tools for microbusinesses and self-employed professionals.

Selecting the right retirement plan for a small business involves careful consideration of factors such as maximizing savings, incentivizing employees, managing costs and administrative complexities, and optimizing tax planning. While this article provides a high-level overview of common small business retirement plans, it is essential to consult with financial professionals to explore specific options tailored to individual circumstances. The world of retirement planning offers a wide range of possibilities for small business owners, empowering them to secure a financially stable future for themselves and their employees.


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