Every day, entrepreneurs work hard to earn a living. Over time, they hope to build up their savings and enjoy a comfortable retirement. In order to grow their savings, it is important to understand what retirement plans are available for business owners. Here are the three top retirement plans for entrepreneurs.
The Top Retirement Plan for Middle-Aged Business Owners: SEP IRA
The Simplified Employee Pension (SEP IRA) is a basic version of the traditional IRA. Where the IRA requires pages of paperwork, the SEP IRA’s forms are very easy to fill out. Like any IRA, the account holder has complete control over what investments are held in the account. This account simply is a tax shelter, which allows contributors to delay paying taxes on the money invest in the account until it is withdrawn.
Who It’s For: The SEP IRA is designed for middle-aged and older entrepreneurs who either have an established company or will be working full-time on their business. For older business owners, the SEP IRA is even more attractive than the standard IRA. Business owners could contribute as much as 25 percent of their net income from the business, with a maximum of $50,000 in 2012 and $51,000 in 2013. (These numbers combined personal contributions and company matches). These figures tower over the standard IRA limits of $5,000 for those under 50 and $6,000 for those over 50.
Who It’s Not For: This is not the best option for younger entrepreneurs, as there is not a Roth option. The limits on a Roth IRA are much lower ($5,000 and $6,000 in 2012), but the tax advantages are tremendous for entrepreneurs in their 20s or 30s. Whereas a taxes on traditional IRA contributions are delayed until the money is withdrawn in retirement, taxes are on Roth IRA contributions are paid up front. After these taxes are forfeited, though, the money can grow tax-free and be withdrawn during retirement without paying taxes again. Thus, young business owners can benefit from decades of tax-free growth with a Roth IRA, but they cannot with a SEP IRA. Successful young entrepreneurs can contribute to both a Roth IRA and a SEP IRA, but the Roth IRA should be maxed out first.
The Top Retirement Plan for Wealthy, Young or Married Entrepreneurs: The Solo 401(k)
The Solo 401(k) has high contribution limits, which are identical to the SEP IRA’s once personal and corporate contributions are combined. The paperwork involved is slightly more complicated than the forms required for the SEP IRA, but the maintenance fees are still low. With most financial institutions, these plans cost less than $100 to set up, and many will create an account for free.
Who It’s For: Because the Solo 401(k) is more flexible than the SEP IRA, it is suitable for several different situations. Wealthy business owners are able to make contributions from their personal assets, but the plan is primarily designed for young or married business owners. Young entrepreneurs can open a Roth Solo 401(k). A Roth version of this plan provides the same tax benefits as a Roth IRA, but the Roth Solo 401(k) has much higher limits than the Roth IRA. Spouses of business owners can also open a Solo 401(k) (or a Roth Solo 401(k)). With their own plan, spouses who have high-paying, secure jobs can make significant contributions to a couple’s retirement account, while the spouse who is the entrepreneur works on starting a business.
Who It’s Not For: Like the regular 401(k), a loan can be taken against a Solo 401(k). However, due to the high fees, penalties, and interest, this is rarely advisable. Anyone who lacks the discipline to leave their retirement account untouched should not open a Solo 401(k) – and they probably should not open a business.
The Top Retirement Plan for Entrepreneurs with Employees: The SIMPLE IRA
The Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) can be set up in the same time that it takes to call Geico for a car insurance quote. The maximum contributions for a SIMPLE IRA are $11,500 in 2012 and $12,000 in 2013 for people under 50. For those over 50, these are increased by $2,500. This is the easiest plan to set up that also provides employees with a way to save for their retirement.
Who Its For: The SIMPLE IRA is for business owners who want to provide their employees with a retirement plan. Entrepreneurs can save for their retirement, while also giving their employees an option to create their own nest eggs. Many small business owners know their employees well and want to help them as the business grows. This is an easy way to do that. It also is a benefit employers can use to attract new employees and keep good employees.
Who Its Not For: The SIMPLE IRA is not an option for anyone who is currently contributing to another retirement plan. (In some cases, this can be used to prevent part-time employees at low paying positions from contributing to it, as they might have another retirement plan at their full-time employers).
The SIMPLE IRA is also not for struggling companies. The business must match all employee contributions, regardless of how the company fares. Employee contributions can either be matched dollar-for-dollar (up to three percent of the employees’ salary), or everyone can receive a two-percent contribution from the company, regardless of personal contributions. Once set up, these matches must be made every year.
These three plans provide more opportunities than standard retirement plans. Young, single and struggling entrepreneurs can find a suitable plan, as can older, successful, married business owners. With the right plan, retirement is only a matter of time.
Category: Money Basics