Small Business Retirement Plans With Only One Participant

If you’re self-employed with no employees this isn’t the article for you!  Check this piece on Solo 401k vs. SEP-IRA.

For business owners or partners that wish to contribute to a retirement plan where no one else in the firm plans to participate, please read on.

First things first, How much do you want to save?

If you’re “just” saving a few hundred bucks a month, you might forgo an official retirement plan and instead make Roth IRA contributions provided your income isn’t too high OR just setup and invest in a regular brokerage account.

Pros:

  1. Easy to setup and administer
  2. Cheap

Cons:

  1. Can’t save very much
  2. No tax deduction

 

What if you want or need to save on taxes?

A big part of what gets people saving isn’t the long-term payoff of saving for retirement or building wealth.  Rather it’s the more immediate gratification of saving on taxes.

Assuming you need tax deferral but lack the ability to use a traditional IRA due to high household income, then you’ll want to consider a retirement plan for your small business.

 

The SEP-IRA

Probably best to avoid this one. You’ll be required to include most employees in the plan and make equal contributions which can ratchet up the cost rather quickly. The only exception that comes to mind is if your business had an exceptional year and the benefit of deferring for everyone outweighs the cost.

You can get an idea of the plan requirements here.

Pros:

  1. Easy to setup and administer
  2. Cheap
  3. Can fund up until you file your taxes, including extensions

Cons:

  1. Could get costly quick

 

The SIMPLE IRA Plan

While not as sexy as a 401k, the SIMPLE IRA is a great starter retirement plan and will fill the need for many small businesses.  As the name implies, it’s designed to be easy to implement and operate. This plan requires only a 2% non-elective contribution or 3% match for those that participate.

This is probably the cheapest option from on the business perspective when you need to set up a plan with only one participant.

Just be sure you follow the rules.

Pros:

  1. Can “defer” salary. Up to $12,500 if under 50 and $15,500 as of 2017
  2. Can match contributions, and
  3. Delay that match up until tax filing
  4. Fairly easy to setup and administer
  5. Cheap

Cons:

  1. Needs to be set up by Oct. 1 for the current year
  2. No Roth option
  3. Match limited to 2% non-elective, or 3% elective
  4. No profit sharing option

 

The 401k

The granddaddy of all retirement plans which actually contains three distinct ways of getting money into your account.

Cash or Deferred Arrangement

The actual money you defer from your salary into your 401k. Maximum salary deferrals are $18,000, plus a $6,000 “catch-up” contribution if you’re over age 50.

Profit Sharing

The optional amount contributed by your employer.

Matching

You may want to brave the stormy seas of life, but not when it comes to retirement plans. The safe harbor match option helps you avoid most testing associated with 401ks and various match schedules are offered.

Pros:

  1. Highly customizable
  2. Can tax-shelter more money
  3. Can restrict eligibility
  4. Roth option available

Cons:

  1. Costly and complex. Be sure you get help!

 

Summary

In this example, I think the SIMPLE IRA gives us the best mix of cheap and easy. Couple that with the fact that you can tax-defer a touch over $1000 per month with a pretty small match (cost) from the employer, makes the SIMPLE worth consideration for many small businesses.

Do you have a question about which small business retirement plan is right for you? Give a call, drop us a line, or leave a comment below.

 

 

 

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