What Small Business Owners Need to Know About Their Retirement Planning Options
When it comes to reinvesting in their businesses, small business owners are pros. Buying equipment, hiring employees, and upgrading systems tend to come naturally. But setting money aside for retirement? That often gets put in the “later” category.
Here’s the problem with that approach: there’s no HR team enrolling you in a plan, and there’s no employer match unless you create one yourself. You need to be intentional about building a retirement plan. Here are some strategies to help you build retirement savings while reducing your tax burden.
Start with a 401(k)
A traditional 401(k) is a good starting point because it allows you to contribute a portion of your income before taxes, which lowers your current taxable income. And what makes it particularly enticing for small business owners is the ability to contribute as both the employee and employer. That means higher total contributions compared to other retirement accounts. These plans come with rules, nondiscrimination testing, and reporting requirements, so the setup is a little more complex, but the savings potential makes it worth your time and attention.
Consider a Roth 401(k) for Future Flexibility
A Roth 401(k) works differently than a traditional 401(k). You pay taxes on contributions now, but withdrawals later are tax-free. This can be useful if you expect to earn more in the future, or if you expect taxes to increase.
Many business owners contribute to both a traditional and Roth 401(k) so they’re not relying on one tax outcome.
SEP-IRA Offers Simplicity
The SEP-IRA is simple to open, easy to maintain, and has no annual filing requirements. Business owners can contribute up to 25% of your net income each year, and contributions can be made up until your tax filing deadline. This is helpful if your income varies.
If you have employees, you’ll have to contribute the same percentage for them as you do yourself, so keep this in mind as your team grows. But for solo entrepreneurs and smaller operations, this is a solid choice.
Solo 401(k): Flexibility for Owner-Only Businesses
If you don’t have employees (other than a spouse), the Solo 401(k) is worth looking into. Like a traditional 401(k), you can contribute as both employee and employer. That often allows you to save more compared to a SEP-IRA at similar income levels.
Many plans also offer Roth IRA contributions and loans against the account if you ever need extra funds, offering both flexibility and control.
Think About Combining Strategies
In most cases, using more than one strategy makes the most sense for small business owners, particularly if you have multiple income streams. For example, you might contribute to a 401(k) through your main business and use another plan for side income.
Making multiple strategies work together comes down to knowing how the plans fit together and staying within contribution limits. The rules can get complicated, so working with a professional can help you navigate the best setup, avoid mistakes, and modify your plan as your business grows or your income changes.
