As a small business owner, it is crucial to plan for retirement. Unfortunately, only 34% of small business owners have adequate retirement savings. Why is that?
Often the best way to save for retirement isn’t clear to entrepreneurs or retirement planning has been put on the back-burner. As an entrepreneur, it’s important to take your financial planning seriously and to give it the proper time and attention it warrants. These are some of the best retirement plans for business owners in Northern Virginia.
SIMPLE IRA
For a business owner with less than 100 employees, the SIMPLE IRA might be the best option. Savings Incentive Match Plans for Employees are easy to set up. They work well for a startup retirement savings plan.
With SIMPLE IRAs, participants can contribute up to $12,500. After age 50, participants can contribute an additional $3,000 per year. Furthermore, employers can match contributions dollar for dollar up to 3% of their salary. SIMPLE IRAs may be established during the calendar year between January 1 and October 1.
SEP IRA
Simplified Employee Pension, or SEP IRA plans are suited best for solopreneurs looking for a no-hassle way to save for retirement. SEP IRAs are easy to set up. Furthermore, they don’t require the same startup and operating costs as other retirement plans.
While SEP IRA plans allow employee contributions, it can be expensive for employers with aggressive saving plans since you must contribute the same percentage for employees that you make yourself.
The contribution limits for this plan are $55,000 or 25% of the participants’ income, whichever is less. For those over 50, an additional $3,000 per year can be contributed. These plans must be established by your company’s tax filing deadline.
[Related: Early Retirement]
Solo 401(k)
Also called one-participant 401(k) plans, the solo 401(k) covers a business owner and his/her spouse. Other employees cannot participate. However, unlike the SEP IRA, Solo 401(k) allows for salary deferrals, as well as profit-sharing contributions. It is easy to set up a Solo 401(k) and it works well for proprietors, partnerships, and S and C corporations. There are no discrimination tests or Form 5500 filings like with traditional 401(k)s.
There is no vesting schedule for Solo 401(k) plans. You contribute to your account and the money is 100% vested immediately. Owners can defer up to $19,500 of their pre-tax income and unlike SEP IRA plans, the Solo 401(k) plan allows business owners over age 50 to do the catchup contribution of $6,500. This makes for a total of $26,000 in annual contributions.
The Solo 401(k) plan must be established by your company’s fiscal year-end. This is typically December 31 for most small businesses. However, profit-sharing contributions can be made up until your business’s tax filing deadline.
Roth IRA
This is one of the most popular retirement saving accounts. It is not a small business retirement plan, there are no plan documents, and you can’t offer this to your employees. You just need to open a Roth IRA account.
Roth IRAs are unique. You can fund them using after tax dollars. While you don’t get to take a tax deduction for your contributions, you can withdraw from this account tax-free if you are over 59 ½ years old. Even the growth is tax-free! No other investment account allows you to take out money 100% tax-free like the Roth IRA.
If you use your Roth IRA strategically, you can offset some of the taxes you would pay when withdrawing money from a SEP, SIMPLE or Solo 401(k). This can lower your taxes and allow you to withdraw less money, giving your money a chance to grow longer.
Roth IRAs allow $6,000 in contributions annually. Furthermore, it allows for catch-up contributions of $1,000 for participants over 50. There are no plan documents required for setup and you have until the end of tax filing to open a Roth IRA. You can also make up contributions until the tax deadline. There is a participation earnings phase out as well.
As you can see, there are many options regarding maxing out your retirement savings that change each year. This is another reason why it is good to have a financial advisor helping you plan. In addition, mistakes can cause a penalty to be assessed by the IRS too.
Retirement Planning for Business Owners in Northern Virginia
As a business owner, your time is important. We understand how busy you are trying to meet demands and grow your business. However, you shouldn’t let your retirement planning fall by the wayside. Contact Argent Bridge Advisors today to learn more about your options for retirement plans.
