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Retirement Plans for Small Business Owners and the Self-Employed

Nearly half of all Americans own or work for a small business. This is Small Business Week, an annual recognition of the critical role entrepreneurs and small business owners play in our economy and the challenges they face. Today’s article looks at one specific challenge – retirement saving – and several potential options.

Simplified Employee Pension (SEP) IRA. The SEP IRA is easy to establish and administer and offers low, if any, annual account fees. In 2021, employers/entrepreneurs can contribute up to 25 percent of their net income up to $58,000. If a business owner has eligible employees, the percentage contributed must apply equally to the owner and employees. Employees can’t contribute to SEPs.

Solo 401(k). Individuals with substantial self-employment income and no employees often turn to a Solo 401(k), which allows them to make contributions as an employee and an employer. As an employee, they can make up to $19,500 in tax-deferred contributions or after-tax Roth contributions in 2021; $26,000 if they’re 50 or over. As an employer, they can contribute another 25 percent of their net self-employment earnings. The total from employee and employer contributions can’t exceed $58,000. The Solo 401(k) can also cover a spouse.

Savings Incentive Match Plan for Employees (SIMPLE) IRA. Inexpensive to set up and maintain, the SIMPLE IRA can be a good choice for business owners with 100 or fewer employees. SIMPLE IRAs require employers to contribute on behalf of their employees. The employer may contribute a dollar-for-dollar match of an employee’s contribution up to 3 percent of the employee’s salary or a flat 2 percent of the employee’s pay. An employee doesn’t have to contribute, but may contribute up to $13,500 in 2021, or $16,500 if they are 50 or over.

Profit Sharing Plan. Less common than the first three, the administrative costs of Profit Sharing may be higher. But it allows flexible, discretionary contributions. Contribution limits for 2021 are the lesser of 25 percent of compensation or $58,000. Employees may not contribute.

Whether you work for yourself or someone else, we can help you make the most of your current income while saving for retirement. We do not provide tax advice; consult your tax professional for more details.