When you go out on your own and become a business owner, you typically give up a few things: the steady paycheck, the office coffee, and the IT guy (this one hurts). In our experience, many business owners assume their retirement plan goes out the window, too.
The good news is that you can still save for retirement as a business owner. In fact, you might have more options now than you did as an employee. And it doesn’t have to be complicated or something you must figure out on your own.
Depending on the plan, some business owners may be able to save up to about 45% of their income for retirement, and many of these plans offer a tax break. Of course, not everyone wants to or can save that much. The point is that there's a wide range of options, from "I’m just getting started" to "I’m making up for lost time."
Retirement plan options, and who they best serve
Here's the lay of the landonretirement plan options for business owners, from the simplest to the most powerful. (Don't worry, you don't need to memorize acronyms.)
Option 1: IRAs (Traditional and Roth). Almost anyone with earned income can open an IRA. A Traditional IRA may lower your taxes today, while a Roth IRA works the other way: you pay taxes now, and qualified withdrawals later can be tax-free. It's a great starting point, but the annual contribution limits are lower than those for the other options below.
Option 2: Small business plans (SEP and SIMPLE IRAs). These are easy to set up and help your business save for you. A SEP is flexible: contribute more during a good year and less in a slow one. A SIMPLE works well if you have a small team and want both you and your employees to save.
Option 3: 401(k)-style plans. If it's just you (or you and your spouse), a solo 401(k) lets you save as both the "employee" and the "employer," which is how some owners reach those higher savings levels we mentioned. If you have staff, a traditional 401(k) can do the same for your whole team. You can also add profit sharing, which lets the business contribute extra money in good years.
Option 4: Cash balance plans. These are pension-style plans, often a good fit for higher-earning owners who got a late start and want to catch up quickly. They're usually paired with a 401(k) and can allow some of the largest contributions available.
Retirement plans are a tax decision, too
At their core, most retirement plans are tax-advantaged tools and savings vehicles. Depending on the plan, your contributions can reduce your taxable income this year or set you up for tax-free income down the road. Choosing the right plan and the correct mix of pre-tax and Roth savings can make a real difference in what you keep.
This is where we're a little different at Aliciene Tax & Financial Solutions. We're both a tax firm and a financial planning firm (and a small business), so we see your tax return and your retirement plan side by side. We're not guessing how one affects the other.
If this sounds like a lot, it doesn’t have to be
You run a business. You don't need a second job researching retirement plans. We can help you:
Figure out which retirement plan (or combination) fits your income, your goals, and whether you have employees
Get it set up and handle the paperwork
Coordinate it with your tax planning each year
Adjust as your business grows or changes
You bring the business. We'll handle the rest.
Why talk about this now?
Some plans have setup deadlines, and a few fall before year-end. Having this conversation in the fall, rather than in the middle of tax season, usually gives you the most options.
If you're self-employed and don't have a retirement plan in place or aren't sure the one you have is the right fit, let's talk.