Retirement Savings Strategies for Small Business Owners

Unlike an employee who might have access to a 401(k), you’re on your own.

Small business owners and self employed individuals have more options then they think. What option is right for you. Here is the breakdown of each option. 

1. Traditional or Roth IRA:
   • This is the easiest way to save for a business owner just starting out. There are no special filing requirements and you can use it whether you have employees or not. 
   • You can save up to $6000 per year (under 50) and $7000 (over 50).  If you’re leaving a job to start a business, you can also roll your old 401K to an IRA. A Roth IRA may be more advantages when you are just starting out with out much income. This does not offer a tax deduction, but will be tax free upon retirement. 
   • These are individual accounts and if you have employees there would no savings match or incentive. They would have to set up and contribute to their own IRAs. 
2. Solo 401K:
   • This is best for business owners with no employees. Unless the other employee is a spouse. 
     • Up to $56,000 in 2019 (plus $6,000 catch-up contribution for those 50 or older) or 100% of earned income, whichever is less. To help understand the contribution limits here, it helps to pretend you’re two people: An employer (of yourself) and an employee (also of yourself).
     • In your capacity as the employee, you can contribute as you would to a standard employer-offered 401(k), with salary deferrals of up to 100% of your compensation or $19,000 (plus that $6,000 catch-up contribution, if eligible), whichever is less
     • In your capacity as the employer, you can make an additional contribution of up to 25% of compensation
     • There is a special rule for sole proprietors and single-member LLCs: You can contribute 25% of net self-employment income, which is your net profit less half your self-employment tax and the plan contributions you made for yourself
     • The limit on compensation that can be used to factor your contribution is $280,000 in 2019
   • This plan works just like a standard, employer-offered 401(k): You make contributions pre-tax, and distributions after age 59½ are taxed
   • You can’t contribute to a solo 401(k) if you have employees. But you can hire your spouse so he or she can also contribute to the plan. Your spouse can contribute up to the standard employee 401k contribution limit plus you can add in the employer contributions, for up to an additional $56,000 total, plus catch-up contribution, if eligible. This potentially doubles what you can save as a couple.
   • particularly attractive for those who can and want to save a great deal of money for retirement or those who want to save a lot in some years — say, when business is flush — and less in others.
   • Keep in mind that the contribution limits apply per person, not per plan —if your spouse has an outside 401k the contribution limits cover both plans.
   • You can also choose a solo Roth 401k which mimics the tax treatment of a Roth IRA. Again, you might go with this option if your income and tax rate are lower now than you expect them to be in retirement.
3. SEP IRA 
   • It works much like an IRA and is simpler to set up and maintain then a 401K. You don't have to do any annual reporting to the IRS like you 
   • This offer the flexibility of not having to contribute every year. 
   • This is best for small business owners with no or few employees. 
   • Contribution limit the lesser of $56,000 or 25% of compensation. 
   • Employees must contribute an equal percentage of salary for each eligible employee, and you are counted as an employee. If you are contributing 10% you must also contribute 10% for your employees. Employees can't contribute to the SEP IRA. This can be a downside. 
     • You can't contribute just for yourself, you have to make contributions to all of your employees.
4. SIMPLE IRA
   
   • This is for larger businesses with up to 100 employees. 
   • Contribution limits are up to $13,000 plus catch up if over 50. 
   • Employees can contribute to the through salary deferral. Employers are generally required to make either matching or up to 3% of the employees compensation. 
   • SIMPLE IRA contribution limits are significantly  lower than SEP IRAs which works well if you have a large number of employees.

Exit Strategies:

1. Liquidation 
   
   • You can choose from two different liquidation strategies either an upfront liquidation or a liquidation over time. 
     
     • Liquidation is simple and can be effective if the performance is solely dependent on one person and asset are easy to liquidate.