Retirement savings for small business owners

Dustin Johnson
By Dustin Johnson

Many considerations go into whether or not to start a small business. Walking away from the perks of being an employee, like a generous 401K match, can be tough. But hanging out your own shingle doesn’t necessarily mean losing access to pre-tax retirement savings. With a bit of planning and discipline, your small business can power your retirement planning as well or even better than your corporate 401K. 

What are the best ways to save for retirement? 

A few basics: as an employee at a company with a retirement plan, you can opt to save money directly from your paycheck into the company’s 401K plan. Some companies offer what is known as a “match.” They put a certain percentage into your retirement account, up to a pre-specified limit. This is above and beyond the salary they pay you.  

Retirement account options for small businesses can look like those you were familiar with as an employee. To choose the best options for your small business, consider its legal structure. If you haven't yet started your business, these are good things to think about when deciding how to structure it.

| Retirement account options for small businesses can look like those you were familiar with as an employee.

What are the options?

In the simplest terms, if you’re running a business with employees, you can create a 401K. It will be similar to the one you had as an employee, except your business is the employer. Seek out Small Plan 401Ks and look for one with the lowest fees. Remember that you’ll have to set up equitable rules for the plan. If you’re going to have the company match 401K investments for yourself, you’ll need to do the same for your employees.

If you own a solo company without employees, look into a Solo 401K. With a Solo 401K, you can make contributions as your business (as a company might do with an employee) and as an individual. The company's contributions can be up to 25% of your net adjusted self-employment income but no more than $61,000 in 2022. Your personal contribution can be up to $20,500 in 2022 and a total of $27,000 if you’re 50 or older. With these combined contributions, you’ll see a lot of opportunities to grow your retirement savings as a small business owner. If your spouse also works in the business, the business can also contribute to their retirement. 

Another retirement account option for small business owners is a SEP-IRA. (SEP stands for Simplified Employee Pension). Anyone with employees or freelance income may be able to open up a SEP-IRA. The rules are slightly different than with a Solo-401K, and since the employer (your small business) is the only one who can contribute, the amount you can save is somewhat lower than with a Solo 401K. In 2022, it’s 20% for businesses and 25% for self-employment work, up to $61,000 in 2022 and $66,000 in 2023. There are no over-50 catch-up contributions with SEP-IRAs.

The benefits of retirement planning through your small business

Retirement planning is a smart thing to do, no matter your age or whether you’re self-employed or traditionally employed. Social Security benefits are generally not enough to cover the needs of people once they stop working. You can make your golden years more comfortable by having a nest egg saved up. If you’re young and can’t imagine squirreling away money for retirement just yet, consider the time value of money. Retirement savings put away in your twenties have forty years to build compound interest. Even if you can’t afford to put away much, starting as early as possible will put you in the best position. Small business retirement investment options make a lot of sense if you're older, especially if you're over 50. It may help you catch up on retirement savings or build more cushion into your existing savings. 

But if the lure of comfortable golden years isn’t enough, consider the potential tax benefits of investing in a small business retirement account. The money you put into the account will reduce the amount of income that you earn. You’re taxed on the income you have left after you’ve saved, and your tax burden is lower. If you’ve been hit with big tax bills in the past, it may be worth your while to look into setting up a small business retirement account. 

There can be many moving parts to the decision to open a small business retirement account. The specifics of your business may change some of the parameters and contribution amounts. Consult a trusted tax advisor before deciding on the plan for you. Do your due diligence in picking a provider with low fees and the kind of flexibility you want in your investments. 

As you’re looking into retirement investment options as a way to secure your future and reduce your small business tax burden, it’s important to keep up with tax deadlines as well. ComplYant allows you to manage your business taxes in one dashboard. Keep on top of tax deadlines as you build your future by signing up for a free account today

Dustin Johnson
By Dustin Johnson
Dustin Johnson is a Senior Tax Research Specialist at ComplYant. Prior to joining ComplYant, he spent over eleven years performing tax research at the world’s largest tax preparation company. Dustin holds a Bachelor of Business Administration and a Juris Doctor. Outside of work, Dustin enjoys biking and spending time with his family.

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