Small business owners always have an eye on the future. And the future includes retirement. Whether planning for one’s own retirement as a solo entrepreneur or setting up funds for company employees, small business owners have options to protect their investments and take care of their workers.

Here are three financial vehicles specially geared to those needs.  For detailed advice, talk to a trusted financial planner.

Simplified Employee Pension or SEP IRA

This type of low-hassle plan allows you to contribute up to 25 percent of each employee’s compensation, including yours. If you’re a sole proprietor, then you contribute up to 25 percent of your net income. Best of all, contributions are tax-deductible.

The plan works best for companies with fewer than 10 employees, writes Judith Anderson, Senior Vice President, Retirement & Personal Wealth Solutions at Bank of America. And she notes, they’re easily adapted to the ups and downs of revenues.

“​​SEP IRAs offer the flexibility to contribute more when business is strong and cut back when things are tighter, ” she says.

But SEP IRAs do have limits. Employees can’t contribute, nor can they take loans from the plan. Workers can, however,  roll over the contributions into Roth or other IRAs.

Setting up a SEP IRA  is relatively simple. First you’ll need to choose a financial institution to serve as trustee. Then you’ll sign a form that establishes the SEP.

Be aware: if you have employees, you must contribute the same percentage of each worker’s income. In order to contribute for an employee, s/he must:

  • Be at least 21 years old and
  • Have been employed in three of the last five years, and
  • Have earned at least $650 this calendar year.

Simple IRA

The formal name is “Savings Incentive Match Plan for Employees of Small Employers,” but the acronym says it all. The plan, like a SEP IRA, is relatively easy to establish through a financial institution. Business owners can get a $500 tax credit for up to three years after launching the fund, and workers get a credit for contributing.

Unlike a SEP IRA, both employers and employees can contribute to the retirement fund. Employees can deposit to $13,500 in the plan; those older than 50 can deposit $3,000 more as a catch-up contribution.

Business owners have two options. They can give 2  percent of a worker’s salary – with some limitations – whether that employee contributes or not. Or they can give a dollar-for-dollar match – with certain income limitations – to only participating employees.

In order to establish a SIMPLE IRA, a business must:

  • Have a maximum of 100 employees who earned at least $5,000 during the preceding calendar year.
  • Not have another retirement plan. For example, if a company already offers a SEP IRA, it can’t also create a SIMPLE IRA.

Solo or Individual 401(k)

This vehicle isn’t an IRA. Instead, it’s a tailored version of the product many corporations offer their employees. The key word here, though, is individual. If you have employees other than yourself and your spouse, you can’t qualify for this plan. The main advantage is participants can contribute both as the employer and as an employee.

Take this scenario from the Internal Revenue Service: “Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2020…” He was able to contribute the maximum of $19,500, plus another $6,500 because he was older than 50. As a business owner, Ben could contribute an additional $12,500 – one-fourth of his annual compensation.

If you don’t pay yourself a salary, the employer contribution is about 20 percent of net earnings, says Adam Levy of the Motley Fool.

Levy points out another restriction – the across-the-board contribution limit on 401(k) contributions.  “…If you participate in and max out a 401(k) or similar retirement plan from another job, your ability to contribute to a solo 401(k) is greatly reduced,” he says. “In that case, a SEP IRA may be a better choice due to its simplicity.”

Afi Odelia Scruggs

Afi Odelia Scruggs

Stuff Writer

Afi Scruggs is our staff writer. Afi is an award-winning multi-platform journalist and author who lives in Cleveland, Ohio. Her articles and columns have appeared in the Washington Post, the Cleveland Plain Dealer, The U.S. edition of the Guardian, USA Today, and Essence magazine and on washingtonpost.com. Her audio segments have been broadcast on national NPR programs as well on local affiliates in northeast Ohio. She’s also written three books: Jump Rope Magic, published by Scholastic; a genealogical memoir, Claiming Kin: Confronting the History of an African-American Family; and an essay collection entitled Beyond Stitch and Bitch: Reflections on Knitting and Life. The New York Times Book Review called Jump Rope Magic a “magical, spunky book.” Afi learned to knit when she was 7 years old and to sew when she was 9. She’s forever working on reducing her stash.

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