Are you self-employed or a small business owner looking to save more than $7,000 / year allowed within Traditional IRA’s to fund the retirement of your dreams? Below is a brief summary of alternative options that can help fund the retirement goals of you and your employees.
- SEP IRA’s – These accounts are very simple and ideal for those who are self-employed or own a business with very few to no employees. For the tax year of 2019, Sep IRA’s allow you to contribute up to $56,000 or 25% of your adjusted net earnings, whichever is less. All contributions are pre-tax. Employers using SEP IRA’s however are required to fund contributions for all employees directly proportional to the amount they contribute to their own account. Employees generally do not contribute to their own account but are allowed to make traditional IRA contributions to this account if desired. As one would conclude, this can get very expensive for employers with multiple full-time employees. Therefore, these accounts are widely popular for those who are high income earners with no full-time employees. Lastly, SEP’s are great for those who have a habit of procrastination as they can be formed any time before an employer’s tax-filing deadline. This can be beneficial if you get hit with a large tax bill as you could potentially make a large SEP IRA contribution to minimize the tax liability.
- SIMPLE IRA’s – These accounts are perfect for small business owners with a few employees looking to make pre-tax contributions between $7,000 - $26,000 / year. In 2019, contribution limits for SIMPLE IRA’s are limited to $26,000. Employees contribute up to $13,000, and the other $13,000 would come from the employer match. Employers with Simple IRA’s are required to make either matching contributions to employee accounts of up to 3% of the employee’s compensation, or alternatively, a fixed contribution of 2% to eligible employees. Employees themselves can contribute to their SIMPLE IRA’s through salary deferral. The limited match to 3% makes these accounts good for employers with just a few employees. You are able to put away a fair amount of money for your own account while helping your employees reach their retirement goals as well, providing them incentive to save on their own as well. You are not allowed to roll your SIMPLE IRA into another IRA within 2 year of contribution, or you could face a 25% penalty.
- Solo 401(k) – These are applicable for a business owner or self-employed person with no employees. They mimic company 401(k)s as the contribution limit is up to $56,000 in 2019, or 100% of earned income, whatever is less. This includes your contributions as both the business owner and employee of the company. Contributions are pre-tax, unless you open up a Solo Roth 401(k), then contributions act as Roth contributions, post-tax, yet tax deferred on growth. Once the plan passes $250,000, you’ll need to file paperwork with the IRS yearly. Employers are also allowed to “hire” their spouse so he or she can also contribute to the plan. The high contribution limits for solo 401(k)’s can be very beneficial for high income earners looking to save a lot in specific years. The greatest downfall, however, is employers are not allowed to contribute if they have ANY employees, outside of a hired spouse.
These are just a few of the many alternative ways for small business owners to save appropriately and abundantly for retirement.
If you need help setting up a retirement account for your business to write of taxes and to prepare for a healthy and wealthy retirement, please schedule a call or a time to come in 805-879-4718. We are here to help.
-Taylor Snider
Financial Advisor