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Small Business Retirement Plan Limits Increased in 2019. Here's What You Need to Know

By Maurie Backman – Jan 7, 2019 at 5:04PM

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Own a small business? You have a greater opportunity than ever to save for the future.

The benefit of working for a large company is gaining access to an employer-sponsored 401(k) -- a critical tool that helps millions of workers save for retirement. But if you're a small business owner, you should know that you have several tax-advantaged savings plans at your disposal that allow you to sock away substantial funds for your golden years. Better yet, the annual contribution limits for all of these plans increased in 2019, so now's a better time than ever to start funding one. Here's an overview of three key plans you might choose to save in.

1. The SEP IRA

Anyone with earned income can contribute to a traditional IRA, and those whose income doesn't exceed a certain threshold can save for retirement in a Roth IRA. The problem with these options, however, is that you're limited to an annual contribution of $6,000 for 2019 if you're under 50, or $7,000 if you're 50 or older.

Man wearing apron next to door with open sign in hand


A better bet, therefore, might be a SEP IRA. Short for simplified employee pension, a SEP IRA is a retirement plan designed for self-employed workers and small business owners. This year, you can contribute up to 25% of your net business earnings (meaning, your earnings minus your business operating expenses, SEP contribution, and half of your self-employment taxes) up to a maximum of $56,000. That's up $1,000 from 2018.

The only catch with a SEP IRA is that if your business employs other people, you'll need to make the same contributions, percentage-wise, to your workers' accounts as you do to your own. This means that if you choose to set aside 20% of your earnings in your own SEP, you'll need to then contribute 20% of each of your employee's earnings to his or her SEP. And that could become an expensive prospect. If you run a business without employees, however, a SEP offers a great opportunity to sock away a bundle. And because those contributions go in tax-free, you'll get some instant tax savings as well.


If you employ other people and therefore can't afford to take advantage of a SEP IRA the way you'd like to, you might consider a SIMPLE IRA instead. Short for savings incentive match plan for employees, the SIMPLE IRA currently has an annual contribution limit of $13,000 if you're under 50, or $16,000 if you're 50 or older. Those numbers are $500 higher than they were last year.

Now like the SEP, there are obligations to fund your employees' accounts with a SIMPLE IRA -- but they aren't as extreme. As a business owner, you must match your employees' contributions to their accounts directly up to a maximum of 3% of their compensation, or contribute a fixed 2% of their compensation to their accounts. Furthermore, if you run a business at which you're the sole employee, you can contribute as both employer and employee. And because SIMPLE IRA contributions are made with pre-tax dollars, you'll snag a tax break for the current year if you fund an account.

3. The Solo 401(k)

You don't need to work for a large employer to gain access to a 401(k). If you're the sole employee of your business, you can opt to save for retirement this year in a Solo 401(k).

Solo 401(k)s work just like traditional 401(k)s in that contributions go in tax-free, thereby lowering your taxes at present. But whereas traditional 401(k)s max out this year at $19,000 for workers under 50, and $25,000 for those 50 and older, with a Solo 401(k), you can contribute up to 25% of your self-employment income (your income minus your business expenses, plan contribution, and half of your self-employment taxes) for a maximum of $56,000 if you're under 50, or $62,000 if you're 50 or older. As with SEP IRAs, those numbers are $1,000 higher than in 2018.

Now that contribution limits have increased for the above-mentioned plans, it pays to focus on maxing out in the coming year, or getting as close as you can. The sooner you begin setting funds aside for the future, the more financially secure you'll be in retirement.

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