This article appears in Atlanta Business Chronicle.
Small business owners navigate a unique path toward financial security, particularly when planning for retirement. While the daily demands of running a business rightfully take priority, establishing a retirement savings plan is a task all business owners should likely move toward the top of the list — both for their own futures and those of their employees.
With all the available options, how can small business owners identify the right retirement savings vehicle for their company? Below, SignatureFD breaks down some of the highlights of each retirement savings option and contribution limits for 2023.
1. Simplified employee pension (SEP) IRA
With a SEP IRA, business owners can make tax-deductible contributions for themselves and their eligible employees. Many business owners choose a SEP IRA for their retirement plan due to its high contribution limits and easy implementation and administration.
- 2023 SEP IRA Contribution Limits: 25% of net self employment income or $66,000, whichever is lesser
2. Savings incentive match plan for employees (SIMPLE) IRA
Like a SEP IRA, a SIMPLE IRA allows business owners to make tax-deductible contributions for themselves and eligible employees. While a SIMPLE IRA is also easy to set up and manage, contribution limits are significantly lower than a SEP IRA. Employers must match participants’ contributions up to 3% of their annual compensation.
- 2023 SIMPLE IRA Contribution Limits: $15,500 ($19,000 for participants age 50 and older)
3. Solo 401(k) plan
Often called a one-participant 401(k), a solo 401(k) plan is designed for self-employed individuals or business owners with no employees other than a spouse. A solo 401(k) allows for employee and employer contributions, providing business owners with flexibility in retirement savings. If you earn less than $330,000 per year, this plan would allow you to contribute more than the SEP IRA due to the available employee contribution.
- 2023 Solo 401(k) Contribution Limits: Total contributions cannot exceed $66,000 ($73,500 for individuals age 50 and older).
4. Defined benefit plan
A defined benefit plan is a traditional pension plan that guarantees a specified retirement benefit based on factors such as salary and years of service. These plans can be attractive for business owners who want to contribute larger amounts and potentially reduce their taxable income. Plus, plan participants know exactly how much they will receive in monthly income after they retire, making it an enticing benefit for business owners and employees.
- 2023 Defined Benefit Plan Contribution Limits: Cannot exceed the lesser of 100% of the participant’s average compensation for their highest three consecutive calendar years; or $265,000.
5. Cash balance plan
Cash balance plans combine the features of a traditional pension plan and a 401(k). High contribution limits make cash balance plans attractive for business owners with steady cash flow who want to maximize savings and create predictable retirement income.
- 2023 Cash Balance Plan Contribution Limits: Varies based on age and plan structure.
6. Profit-sharing plan
Many small business owners choose profit-sharing plans because they can make discretionary contributions to employees’ retirement accounts. Owners can vary contributions yearly as profits fluctuate or proportionally based on each employee’s annual salary.
- 2023 Profit-Sharing Plan Contribution Limits: Total contributions cannot exceed $66,000 ($73,500 for individuals age 50 and older)
7. Roth IRA or Roth 401(k)
While not exclusive to business owners, Roth accounts provide tax-free growth and tax-free withdrawals in retirement. Business owners can consider offering Roth options within their retirement plans to provide additional tax diversification for their employees.
- 2023 Roth IRA Contribution Limits: $6,500 ($7,500 for individuals age 50 and older).
Advantages of retirement savings options
The prevalence of retirement savings options for small business owners can vary widely, and it’s not uncommon for owners to lack formal retirement plans. However, the statistics on this issue may change over time and by region, making it difficult to provide an exact figure. Factors such as the size of the business, the industry and the owner’s financial situation can influence whether retirement savings options are in place.
Having a retirement savings option can potentially help small businesses hire and retain more people in the future. The specific impact of offering retirement savings options on a small business’s ability to hire more people may vary depending on factors such as the industry, location and the overall compensation package offered. Additionally, the type of retirement plan chosen, its features and the level of employer contributions can influence its attractiveness to employees.
Offering retirement savings options can also help small business owners save money more efficiently for their future. While upfront costs are associated with establishing and administering retirement plans, the long-term benefits, including tax savings, employee loyalty and the potential for investment growth, often outweigh these initial expenses. Additionally, government incentives may be available to encourage small businesses to offer retirement plans to their employees.
While there are clear advantages to setting up retirement savings options for small business owners, we recommend basing the decision on various factors, including the business’s financial health, long-term goals and the desire to attract and retain employees.
Choosing and implementing a retirement plan can be a big task, especially for small business owners with a lot on their plate. However, retirement savings options can benefit owners and help small businesses attract and retain employees. We recommend working with a financial professional who can help you identify all the opportunities and assist with establishing and managing your company’s retirement plan.
Do you have questions about retirement savings options for your business? Contact Matt Barber, director of SignatureENTREPRENEUR, today.
SignatureFD is a financial advising firm headquartered in Atlanta, Georgia. We believe in helping our clients achieve wealth beyond money. Our team of investment, financial planning, and tax experts are committed to proactively helping clients take control of their financial lives and achieve their goals.
Matt Barber, CFA, CFP, is a partner, wealth advisor and director of SignatureENTREPRENEUR. He specializes in working with business owners to develop a coordinated plan for taxes, develop a succession plan, and ensure appropriate asset protection. He is a member of the University of Georgia Financial Planning Alumni Association and the CFA Society of Atlanta.