The Best Retirement Plans for Small-Business Owners

Save money for retirement and shield income from Uncle Sam by establishing a retirement plan today.

Mar 1, 2014 at 2:00PM

If you're a business owner, several retirement plans exist that offer tax-deductible contributions, tax-deferred earnings, and a variety of investment options. But how do you decide which is the best retirement plan for your business? Here's a summary of three popular plans, along with advantages and considerations of each one. 

An SEP IRA is a business retirement plan available to business owners and their employees. SEPs are especially attractive to self-employed individuals without employees. Contribution limits on these plans are remarkably high. For the 2013 tax-filing year, the SEP IRA allows contributions up to 25% of compensation or $51,000, whichever is less. The same percentage of compensation must be made for every employee, and contributions to SEP IRAs are always 100% vested, or owned, by the employee.

You as the employer decide if contributions will be made year to year. That gives you the flexibility to maximize contributions during years when the business is generating significant cash flow and suspend contributions in lean years. Regardless of how much you contribute as the employer, eligible employees can make traditional IRA contributions to their SEP IRAs, allowing them to exclude income from their own individual taxes.

SEPs are very inexpensive and don't require special IRS filing like others do, which makes them even more desirable for business owners. Even better, the SEP IRA is the only plan that an employer can still establish and fund for the 2013 tax-filing year, making it the best retirement plan for small-business owners who want to contribute for 2013.

The SIMPLE IRA is a low-cost, easy-to-administer plan for businesses with up to 100 employees or for self-employed individuals. A key benefit of the SIMPLE IRA is that it's a salary deferral plan with both employee and employer contributions. Employees can decide how much to contribute, and you as the employer must also make contributions.

For the 2014 tax-filing year, the SIMPLE IRA allows salary deferral contributions up to $12,000, or $14,500 if age 50 or older. As the employer, you must make either a dollar-for-dollar match of salary deferrals up to 3% of a participant's compensation or a non-elective contribution equal to 2% of each eligible employee's compensation. 

Solo 401(k)
For sole proprietors who want to make the highest contribution possible for themselves (and, if applicable, a working spouse), the solo 401(k) is a great, low-cost option. The biggest benefit of this type of plan is that it allows for the highest contribution. As the employer, you decide whether to make pre-tax (and, if permitted, Roth after-tax) salary deferral contributions and the discretionary contribution percentages.

For the 2014 tax-filing year, the solo 401(k) allows salary deferral contributions of 100% of compensation, up to $17,500 or $23,00 if age 50 or older. As the employer, contributions can be made up to 25% of compensation. Salary deferrals plus employer contributions may not exceed $52,000 for tax year 2014, excluding catch-up contributions. 

Foolish takeaway
Consider establishing a retirement plan for your business today. By doing so, you'll not only save money for your retirement, but also keep more of your business income shielded from Uncle Sam. You can find more information about the best retirement plans for small-business owners directly from the IRS. Then be sure to check out brokerage firms that can help you establish the best plan to meet your needs.

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4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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