Top Retirement Plans for Small Businesses Without Employees

What are your retirement plan options as a small business owner without employees and how can you get started? 

As a small business owner without employees, you have many options for a retirement plan.  If your business is just you (or just you and your spouse), you can put away a ton of money in tax advantaged accounts without having to consider how your personal contributions impact your employee compensation. Instead, saving in tax advantaged retirement accounts helps you save taxes in high income working years so you end up paying less tax overall. 

So what are your options for a small business retirement account? And which one is best for you? 

Individual Retirement Account (IRA) 

As of 2022, you can put $6,000 away in an Individual Retirement Account, or IRA. Putting away this amount is a great place to start saving for retirement as a business owner. 

You might be able to write off the contribution now. That would mean you are saving into a Traditional IRA. This is where you don’t pay tax today, but you then have to pay the tax when you take the money out in the future. 

You also might have to pay tax now when you contribute to a Roth IRA. The great thing about a Roth IRA, however, is that you never have to pay tax again. This is a huge advantage for young business owners who have years to have their investments grow tax free. 

Whether or not you can contribute to a Traditional IRA or Roth IRA depends on your income level and whether or not you (and your spouse) have access to other ways to save for retirement. 

There’s also a strategy called a Backdoor IRA. Ultimately, this allows higher income earners to put away money in Roth accounts. There are additional details to when this works and when it doesn’t. You’ll want to discuss with your financial planner to figure out if this is the right strategy for you. 

Regardless of the type of IRA you decide on, it’s a great option to start tucking away those tax advantaged dollars. You can put money into a Traditional IRA or Roth IRA and also set up one of the business retirement plans mentioned below to save additional dollars.  

Simplified Employee Pension Individual Retirement Account (SEP IRA) 

With a SEP IRA, you are often able to put away more than in a Roth or Traditional IRA. You can put 25% of your compensation (up to $61,000 in 2022) into a SEP IRA.

One of the biggest advantages of a SEP IRA is that this plan can be set up all the way until you file your taxes. This means you can figure out how much you made in a year, figure out what your tax bill is, and then open a SEP IRA. If you file on extension as a sole proprietor, you can contribute in October for the year before! 

SEP IRAs are pre-tax retirement accounts, meaning that you write off the retirement contribution now, and you’ll pay tax when you take the money out in retirement. 

Solo 401(k)

A Solo 401(k) is another great option for small business owners without employees. With this plan, you can put away a maximum of $61,000, just like in a SEP IRA. However, if you make less than $305,000 a year, you’ll typically be able to save more in a Solo 401(k) as compared to a SEP IRA. This is because you can deduct the first $20,500 on the first dollars of income, and the 25% of compensation limit only applies to the remaining $40,500. 

Another advantage of a Solo 401(k) is that you can also set it up to be able to handle both Roth IRA and Traditional IRA contributions. It’s nice to be able to have both Roth and Traditional accounts in retirement. This gives you more options to minimize your tax bill as things change from year to year in retirement. 

Setting up a Solo 401(k) is a bit more complicated than a SEP IRA, but it is simpler to set up and maintain than a traditional 401(k). 

You do have to plan ahead to be able to take advantage of a Solo 401(k). The plan needs to be established (but not necessarily funded) by December 31st of the tax year in question to be able to fund both the whole $61,000. The deadline to actually put money in changes depending on whether or not you are a sole proprietor, S-corp, or C-corp. 

Defined Benefit Plan

As a high income small business owner without employees, the defined benefit plan is an awesome way to tuck away $100,000 or more into tax advantaged accounts. A defined benefit plan is a pension, so when you set up this account, you are creating your own pension for yourself. 

You do need to have stable cash flow and a high income for this to make sense. Unlike the other accounts mentioned above, the contributions aren’t optional. You have to be able to put away these high amounts for several years. However, depending on your age, income, and the details of the plan, you can even tuck away millions into a defined benefit plan. 

A defined benefit plan is complicated and expensive to administer, but for the right person, the  tax savings are amazing. 

An Account to Avoid: Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE IRA) 

A SIMPLE IRA is easy to set up, but the contributions are far lower than the Solo 401(K) mentioned above. The contribution limit is $14,000 for 2022, with a catch up contribution of $3,000 for those over 50. There are also additional restrictions to rollover contributions. If you are a business owner with a SIMPLE IRA, please consider reaching out to a financial advisor to see if you can put away more money in tax advantaged accounts with less restrictions. 

So, what is the best retirement account option for a business owner? 

As a business owner, there are many opportunities to put away tax advantaged savings for retirement. The right plan for you will depend on your goals and your business. From the big things, like whether your business has qualified employees, to the little things, like rules for account set up, there are a lot of factors that go into deciding which plan will work best for you to maximize your retirement income. 

If you are interested in starting a relationship with a financial advisor who can help you sort these factors out, sign up for a free 1:1 consultation with me!

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