Retirement Plan Options for SMB Owners

BY: Paul Zander

Here’s a hypothetical scenario that, for many small business owners, will probably sound familiar: You started your own operation, and maybe things were a little tight at first, but after a few years of hard work and determination, business is pretty good, and you’re starting to make some money. Maybe you’ve even brought on a few employees to help with the workload.

After neglecting your retirement savings the last few years, you decide it’s time to start making contributions again. After all, you could use the tax deduction. You look at the options for individual retirement contributions and find out you’re limited to a contribution in 2021 of $6,000 or $7,000, depending on age – it could be even less ,if you or your spouse are covered by a retirement plan through an employer.

You think to yourself, “That’s it? When I had a 401(k) through my last employer, I was able to contribute close to $20,000 per year, and in addition to that, I got a company match and benefited from profit sharing. Why can a person contribute so much to a work retirement plan, while the individual contribution limits outside of an employer plan are so low? Who makes these rules?” The answer: Congress.

You decide to look at the retirement plan options that are available to you as a small business owner and find it all a bit overwhelming. You see that some employer plans have testing requirements, some have actuarial requirements. You’re required to establish plan documents, and you’ll possibly even need a third-party administrator who collects a fee just to make sure you’re following all the IRS rules and filing requirements.

You don’t have time for all this. You have a business to run, and you just want something that is easy and inexpensive to set up and operate, and that doesn’t take up a lot of your time. This is where a SEP IRA or SIMPLE IRA can make a lot of sense. These are employer plan options available to small business owners that can give you (and your employees) the ability to contribute more toward retirement than an individual Traditional IRA account, without all the testing and filing requirements that normally come with a qualified plan. Compared to a qualified plan like a 401(k), the contribution limits with the SEP or SIMPLE plan are a bit lower, but they might be enough to satisfy your needs, without all the additional costs and complexity.

With a SEP IRA, which is short for Simplified Employee Pension IRA, contributions can only come from the employer. This employer contribution can be up to a maximum of 25% of the owner’s net earnings or an employee’s annual salary, and is capped at $58,000 in 2021. You must include any employees in your SEP IRA plan that have reached age 21, have worked for your company for three of the past five years, and have received at least $600 in compensation. Generally, with a SEP IRA, the owner and all employees are required to receive the same contribution percentage to their individual accounts. Because of this requirement, SEP IRA plans are much more popular with business owners that do not have employees. For those with employees, the SIMPLE IRA may be the preferable choice.

A SIMPLE IRA, short for Savings Incentive Match Plan for Employees, includes contributions from both from the employee and employer. In 2021, contributions can be made from an employee’s payroll up to the limit of $13,500, or $16,500 once you reach age 50. The employer can choose to either match employee contributions, up to 3% of employees’ pay, or make a 2% non-elective contribution. An employee would become eligible for the SIMPLE IRA plan once they have earned $5,000 in compensation in any two previous calendar years. The SIMPLE IRA is no longer an option for a business once they have more than 100 employees.

Whether your motivation is to realize a tax deduction, increase personal retirement savings, or help attract and keep employees, a SEP IRA or SIMPLE IRA could be a great retirement plan option for your small business. 

To learn more, please reach out to me directly at (608) 798-5934. I look forward to discussing your options with you!


Paul Zander

Related Blogs

Sign Up For Our Newsletter