As a small business owner, you are completely responsible for your own retirement planning. If you have employees, you may feel responsible for helping them plan for a successful retirement. The considerations and retirement savings plans that work for you, as a small business owner, should be paramount when planning for both your own retirement and that of your employees.
Key Takeaways
- Small business owners are responsible for their own retirement planning as well as that of their employees.
- Though ideally, a small business owner can sell their business before retirement for a tidy profit, this is not always guaranteed nor is the sale amount.
- Some ways small business owners can ensure retirement savings are by establishing a SIMPLE IRA, a SEP IRA, a traditional or Roth IRA, and a Solo 401(k).
Choose a Traditional Retirement Strategy
There are sometraditional options other than using your small business to fund your retirement, such as IRAs and 401(k)s, that function as additional sources of retirement income other than liquidating your small business.
Establish a SIMPLE IRA
The savings incentive match plan for employees, or SIMPLE IRA, is one retirement plan available to small businesses. In 2024, employees can defer up to $16,000 of their salary, pretax (up from $15,500 in 2023). Those who are 50 or older can defer up to $19,500 in 2024 ($19,000 in 2023) by taking advantage of a $3,500 catch-up contribution.
The catch-up contribution remains at $3,500 in 2024, so the total that those who are 50 or older can defer is $19,500. However, employees who participate in other employer-sponsored plans can contribute no more than $23,000 in all employer-sponsored plans combined (up from $22,500 in 2023).
Employers can match employee contributions to a SIMPLE IRA up to 3% of the employee’s compensation. Conversely, employers can contribute 2% of each eligible employee’s compensation up to $345,000 in 2024 ($330,000 in 2023). Employer contributions are tax-deductible.
Businesses are not required to provide employees with any retirement plans. These are generally seen as a benefit. If your company doesn't provide one, you have other options, the best of which is opening a traditional or Roth IRA.
Set Up a SEP IRA
A simplified employee pension (SEP) is another type of individual retirement account (IRA) to which small business owners can contribute. In 2024, it lets employers make pretax contributions of up to 25% of the employee's income or $69,000 ($66,000 in 2023), whichever is less.
Like a SIMPLE plan, aSEPlets small business owners make tax-deductible contributions on behalf of eligible employees, and employees won’t pay taxes on the amounts an employer contributes on their behalf until they take distributions from the plan when they retire.
Almost any small business can establish a SEP. It doesn't matter how few employees you have or whether your business is structured as a sole proprietorship, partnership, corporation, or nonprofit. Each year, you can decide how much to contribute on behalf of your employees, so you aren’t locked into making a contribution if your business has a bad year. Owners of the business are also considered employees and can make employee contributions to their own accounts.
Overall, the SEP plan is a better option for many small businesses because it allows for larger contributions and greater flexibility.
IRAs and Solo 401(k)s
If you’re in a competitive field and want to attract the best talent, you might need to offer a retirement plan, such as the two described above. However, employers are not required to offer retirement benefits to their employees.If you don't, one way you can save for your own retirement without involving your employees is through a Roth or traditional IRA, which anyone with employment income can contribute to.
You can also contribute to an IRA on your spouse’s behalf. Roth IRAs let you contribute after-tax dollars and take tax-free distributions in retirement; traditional IRAs let you contribute pretax dollars, but you’ll pay tax on the distributions. The most you can contribute to an IRA in 2024 is $7,000, or $8,000 if you’re 50 or older. These limits are up from $6,500 and $7,500 respectively for tax year 2023.
Finally, if your small business has no eligible employees other than your spouse, you can contribute to a Solo 401(k).
Develop an Exit Strategy for Your Business
It might seem strange that developing a business exit strategy should be one of your first considerations when planning for retirement. But consider this: the small business you spend your life building might become your largest asset.
If you want it to fund your retirement—andto stop working—you’ll need to liquidate your investment. To prepare to sell your small business one day, it needs to be able to operate without you. It’s never too early to start thinking about how to accomplish that goal and about how to find the best buyer for your small business.
Market conditions will affect your ability to sell your business. You might want to build flexibility into your retirement plan so you can sell your stake during a strong market or work longer if a recession hits.
You definitely want to avoid a distress sale: One problem you’ll encounter if you wait until the last minute to exit your business is that your impending retirement will create the impression of a distress sale among potential buyers and you won’t be able to sell your company at a premium.
Why Do Small Businesses Not Offer 401(k)s?
Sometimes small businesses do not offer 401(k)s simply because they do not have the resources for it. The small business owner may not have the time or knowledge to put together a 401(k) for the company. They may also not have access to a trusted financial institution that can provide one. Furthermore, it may be too costly for the company to set up a 401(k).
Can You Start a Retirement Plan on Your Own?
Yes, you can start a retirement plan on your own. The most simple way is to establish a traditional or Roth IRA and start contributing. Depending on your specific situation, you may also be able to open a Solo 401(k).
How Much Can You Contribute to an IRA?
The amount you can contribute to an IRA (traditional or Roth) in 2024 is $7,000. This is up from $6,500 in 2023. For both years, if you are 50 and over, you can contribute an additional $1,000.
The Bottom Line
Many small business owners say that they don't want to retire, or at least not retire fully. But even if you’re among the many small business owners who plan to keep working, establishing a retirement plan for your small business is a good idea because it gives you options—and having options means you’ll feel more satisfied with whatever path you choose.
