Thin(k) About Your Retirement Plan: Options For Small Business Owners And Self-Employed Workers
Not everyone has the option to save for retirement through a company sponsored plan. So, what are the retirement saving options available to small businesses and self-employed individuals looking to retire someday with a nest egg? Small businesses employ a large percentage of the population and having once been a small business owner, I know how hectic the average day can be. Moving a retirement savings plan up the priority ladder can be difficult. Making it a priority, however, should be a priority! But, how?
Typically, the amount you want to save annually will drive the decision. Don’t think just about today, but into the future about how much you might want to save. Each vehicle or plan, which I will describe in more detail below, has a maximum amount the IRS will allow to be deposited each year. Additionally, each plan type has different administration requirement and, in general, the more you can save, the more complex the administration requirements. The limit on savings for 2021 range from $6,000 to $58,000 and some options allow “catch up” additional contributions for people over 50. These maximums are subject to change annually.
So, which type of retirement account might be best for you? Here are some of the basics.
Traditional IRA
An IRA may be the simplest way to begin saving for small business owners and self-employed individuals. You will need to open an account with a financial institution able to hold IRAs. The maximum tax deferred annual savings limit for 2021 is $6,000 with a “catch-up” contribution of $1,000 tax for those over 50 for a total of $7,000. This type of plan has no annual filing requirements for the employer, so only the employee contributes from earnings.
Roth IRA
A Roth IRA is like the Traditional IRA in that it is simple to open and requires no extra filing requirement for the employer. Your 2021 annual savings limit is $6,000 ($7,000 if age 50 or older) but there are income constraints on your ability to save this way. For instance, in 2021, a married couple filing jointly with modified adjusted gross income (AGI) greater than $208,000 may not use a Roth IRA. However, that same couple with modified AGI less than $198,000 can contribute up to the limit. The maximum is reduced if the modified AGI is between those two amounts. Individuals have different constraints.
SEP IRA
The SEP IRA is available to any employer with one or more employees, offers higher limits and while the plan does have to be set up with the IRS, it does not require an annual filing. SEP IRA contributions are made by the employer only and for 2021 are limited to 25% of compensation with a maximum of $58,000. The employer may elect to make these contributions annually, but must offer the same percentage of salary to each employee.
SIMPLE IRA Plan
A SIMPLE IRA Plan is available to employers with less than 100 employees, allows for contributions from employer and employees and requires minimal paperwork. These plans must be set up with the IRS, but do not require the employer to make an annual filing. Usually, a bank or financial institution administers the paperwork. For 2021, employees are limited to contributions of $13,500 ($$16,500 if over 50) and the employer must either match employee contributions 100% up to 3% or contribute 2% of each eligible employee’s salary. There is some flexibility in the matching requirement.
So there you have it. The above offers basic information on some of the retirement savings options available to small business owners and self-employed workers. Next time, I will write about starting up a 401(k) Plan. Stay tuned.
Remember, move this up the priority list sooner rather than later. And take the necessary steps to learn more, pick the right plan for your situation and get started saving for retirement. I would highly recommend you consult with your tax advisor as the rules and limits for these retirement savings plans change regularly.
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