What Retirement Plans Can I Choose as a Small Business Owner?

As a self-employed small business owner or independent contractor, you’re likely so focused on the present. Every minute of every day, your mind is on making money to make a living for yourself and your family. This is an excellent goal, but you can’t forget about the future. You must have a retirement plan in place, no matter how old or experienced you are.

If you are looking to set up a new retirement account for yourself, or you’re interested in establishing a different plan, consider these retirement plans for small business owners and self-employed contractors to help you enjoy the golden years with adequate financial stability.

Payroll-deduction IRA Retirement Plan

If you aren’t interested in arranging a formal retirement plan for yourself, you still have the option of setting up an Individual Retirement Account (IRA). If you have employees, they can set up an IRA for themselves when you take payroll deductions. This allows you—as the employer—to choose when and how much you contribute to an employee’s IRA. This can be accomplished by increasing the gross pay of an employee by the actual amount you would like to give this employee.

This IRA scenario provides small business owners and 1099 independent contractors with a simple and low-cost method to help both themselves and any employees they manage in order to save money for the future.

Keep in mind that the annual contribution limits for this type of IRA plan are $5,500 for those under age 50 and $6,500 for those 50 and older. Such an IRA arrangement can be established as late as the due date or extension due date of your income tax return in any given year.

Simplified Employee Pension (SEP) Retirement Plan

The SEP retirement plan allows small business owners to open up SEP IRA plans for both themselves and any of their employees. Employers with these plans are required to contribute a set percentage of money for all employees who cannot make their own contributions to such an account.

Aside from making contributions to an SEP plan, establishing such a retirement plan does not entail any additional fees. As an employer, you have the ability to choose whether to contribute to all of your employees’ plans at any point throughout the year. An SEP for one year can be set up in the following year, but it must be done prior to filing your income tax return with the IRS.

SIMPLE IRA Retirement Plan

The SIMPLE IRA plan allows the employees within a small business to contribute a certain percentage of their income to an IRA. Employers who offer such a plan must either match their employees’ contributions on a dollar-for-dollar basis up to 3%, or they can pitch in with a fixed contribution for each employee who is eligible, even if an employee opts out of contributing to the plan. SIMPLE IRA plans are designed for small businesses with 100 or fewer employees on staff, so they are not intended for larger firms.

Like an SEP retirement plan, the SIMPLE IRA plan is also a low-cost option with minimal setup and operational costs. Plus, such a plan can be formally arranged during the following year, while tax write-offs on contributions to the plan can be applied to the current tax year.

Self-Employed 401(k) Profit-Sharing Retirement Plan

This popular self-employed retirement plan allows self-employed workers to make large contributions to it as both an employer and as an employee. There are two types of contributions you can make to a self-employed 401(k) plan:

1. You can contribute a percentage of the net profit you earn, and this amount represents the employer’s profit-sharing part of the plan
2. You can contribute a fixed-dollar amount that can be up to the employee 401(k) contribution limit

In 2016, the maximum self-employed 401(k) contribution limit is $53,000 or $59,000 for those 50 and up. Earning sufficient income, a husband and wife working for the same business may contribute up to $106,000 combined or $118,000 for couples over 50. Because of the way the contribution is calculated, a larger contribution usually can be made to a Solo 401k than to other retirement plans at the same income level. This is why the self-employed 401(k) plan is usually the best option for maximizing retirement contributions and valuable tax deductions while reducing income taxes.

Remember that you must establish a self-employed 401(k) retirement plan before the end of any given year in order to make a deductible contribution to the plan for the year in which the account is established.