Retirement Accounts for Entrepreneurs

By: Laura Zarrate

The American ideal is rooted in the entrepreneurial spirit. Small-company ownership is a great but dangerous road, and some business owners may feel overwhelmed while trying to balance their personal and professional financial requirements.

According to my observations of successful business owners, they are correctly focused on growing their company in the short term but neglect the value of rigor and discipline in taking the long view, that is, on increasing their retirement fund.

From Simple IRAs and Solo 401(k)s to SEP IRAs, small businesses have many retirement savings options to choose from. Here are the basics to get started. Thankfully, the tax code gives self-employed people effective tools to help them build and expand their nest egg—the majority with pretax money. Of course, there are the reliable traditional and Roth IRAs, which are accessible to both wage earners and self-employed people alike. However, one should not discount their advantages.

The typical IRA enables pretax contributions up to $6,000 per year ($7,000 per year if you're 50 or older), and the money grows tax-free. The Roth IRA accepts the same pre-tax contribution limits. It doesn't offer a tax reduction right away, but it grows tax-free. Additionally, there may be income restrictions that apply to IRAs; for more information, a small-business owner should speak with a tax and/or financial advisor.

If you have a business with no employees

In a solo 401(k) plan, the company owner serves as both the employer and the employee. The plan accepts contributions in both capacities. The proprietor may have you contribute as an employee up to 100% of their earned income up to $27,000 in 2022 ($26,000 in 2020 and 2021) if you're over 50 or $20,500 in 2022 ($19,500 in 2020 and 2021). Additionally, in its capacity as an employer, the company can contribute an additional 25% of the employee's salary. This is a double tax benefit!

By contrast, the SEP IRA features lower plan fees and easier administration, but uses a different formula to determine annual contribution limits. The business owner may set aside no more than $56,000 or 25% of their annual salary, whichever is lower.

Thus, a self-employed realtor making $200,000 a year could contribute up to $50,000 to a pretax SEP IRA. SEP IRAs do not contain catch-up provisions, in contrast to other forms of retirement plans.

If you have a business with employees

The 401(k), a mainstay of the business world, is accessible to small enterprises as well. These plans have high contribution caps, with employee contributions limited to $19,000 per year (or $25,000 if you're 50+) and employer contributions limited to $56,000 per year (or $62,000 if you're 50+). In order to assist both the business owner and their employees in reaching their financial objectives, it provides customizable design, participant loans, pretax and Roth alternatives, as well as a number of other features. Depending on their age, a small business owner can contribute up to $62,000 per year on a pretax basis if the plan is properly managed.

However, due to the complexity of these plans, business owners should seek suitable expert help to make sure they are being implemented properly. Additionally, employers must ensure they are complying with all federal compliance requirements and be aware of nondiscrimination testing, which states that the plan cannot favor them or other highly compensated employees.

Simple IRA. Compared to a 401(k), this kind of plan is less expensive and simpler to manage. A pretax contribution of up to $13,000 ($16,000 if over 50) can be made by the employee in addition to the 1% to 3% of income that the employer contributes to the employee's plan. Compared to the traditional IRA, this plan allows for more contributions, but obviously not as much as the 401(k). The Simple IRA offers higher contributions than standard or Roth IRAs, but less than the 401(k). This is the evident trade-off (k). It is a decent "middle of the road" answer.
Let’s hop on a quick call to discuss tax advantages on retirement plans.

The opinions expressed are those of the author and do not necessarily represent the opinions of ATHENA CPA or its management. This article is provided for educational purposes only and should not be relied upon as investment advice.

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