Retirement is what most entrepreneurs look forward to reaching later in life. Yet, a retirement plan does not materialize on its own as it requires taking several actions. Entrepreneurs need to look into retirement options, planning, and money-saving. Selecting a retirement plan and deciding on the size of the nest egg will not be the same for everyone. It depends on the lifestyle and freedom the entrepreneur desires when they retire.
Top 6 Retirement Plans for Business Owners and Entrepreneurs
Setting up a retirement plan is a do-it-yourself task for entrepreneurs. Get to know your options for the type of business you have (with or without employees). The right retirement account should be easy to manage while still offering the necessary tools to understand what you are saving and drive a decent return. Here are the top six retirement plans for busy entrepreneurs.
1. Simplified Employee Pension (SEP) IRA
The Simplified Employee Pension (SEP) is an IRA for sole proprietors. Business owners can make pre tax retirement contributions for themselves and their employees. SEP IRA has several benefits that include low to non-existent annual account fees. It also offers funding flexibility and tax deductions.
Just as it is easy to set up and manage a SEP IRA account, the rules on contributions are also simple. The investor can put as much as 25% of net income into a SEP IRA account. The cap for 2021 is $58,000, which changes to keep up with inflation. Yet, if you have employees, they cannot be contributors to the SEP IRA. Instead, they can make contributions to a traditional or Roth IRA.
2. A Due Annuity Plan
A Due Annuity Account is a great way to guarantee savings. Every annuity account comes with no hidden fees and a guaranteed interest rate of 3%. This guaranteed rate can be helpful in a volatile market as it guarantees that your money will continue to grow.
This account also has handy features like a Due Calculator that helps you understand how much you need to save now to retire later. Additionally, the account view clearly outlines how much money you will receive on a monthly basis during retirement. Finally, if you have an expected expense and need to cash out your due annuity, you can do so at any time.
3. Savings Incentive Match Plan for Employees (SIMPLE) IRA
A Savings Incentive Match Plan for Employees (SIMPLE IRA) is another retirement plan. Entrepreneurs can have a SIMPLE IRA to offer eligible employees. Workers can choose to contribute part of their pre tax compensation to the retirement plan. Plus, employers have to match employees’ contributions of up to 3% of their pay.
Any money an employee contributes to a SIMPLE IRA belongs to the employee. Even if the worker leaves the company, all retirement contributions go with them. Other plan benefits include, it is easy to create, maintain, and is cost-effective.
For 2021, the contribution limit is $13,500 a year or $16,500 if over the age of fifty. Take notice a 25% penalty comes with any withdrawal from the SIMPLE IRA account within its first two years.
4. Solo 401(k)
With a Solo 401(k), business owners can choose to make pre- or post-tax contributions. Entrepreneurs must be self-employed and have no employees other than a spouse. If the business needs to hire employees, the entrepreneur can convert the Solo 401(k) to a traditional 401 (k) plan.
A Solo 401 (k) has many benefits for entrepreneurs. Advantages include not getting taxed on contributions or earnings until retirement begins.
Having a Solo 401 (k) is also more cost-effective than the traditional 401 (k). The account also offers a significantly higher contribution limit than other retirement plans. Contributions can be as much as $19,500 to the Solo 401(k), or $26,000 if over the age of 50, in 2021.
5. Keogh Plan or HR10
Self-employed individuals can choose the tax-deferred Keogh pension plan. Some know this plan as HR10 or as a profit-sharing plan. This plan is for those who are self-employed or small business owners in the United States.
Keogh plans are usually in the form of a defined contribution plan. The contribution is of a fixed percentage or sum from every pay period. The cap in 2021 is at $58,000. A second option is to structure it as a defined-benefit plan. The maximum annual benefit for 2021 is $230,000 or 100% of the employee’s compensation, whichever is lower.
6. Traditional or Roth IRA
If none of the other retirement plans seem to be a good fit, entrepreneurs can choose to open an individual IRA. Traditional or Roth IRAs are available to those with employment income, including freelancers.
The Difference: Traditional Vs. Roth IRAs
- Traditional IRA plans let you contribute pretax dollars.
- Roth IRAs permit contributions to after-tax dollars.
If in 2021 you are over the age of 50, the most annual contribution is $6,000, $7,000, or your total earned income. It depends on whichever is less.
If you have a retirement plan like a 401(k) from before becoming self-employed, there are options. You can transfer the accumulated savings to a rollover IRA or a Solo 401(k).
Self-employed, small business owners and entrepreneurs need to know their retirement plan options. Find out which retirement account best suits businesses of different types. Do you have several employees? Do you have no employees? Or is the only person working at your company a spouse or dependent? Depending on how you answer each question can influence and even change the plan you select.
To make sure the many years of the money you have saved do not go to waste, you must choose the correct account.
Time sneaks up on most of us, especially busy entrepreneurs and business owners. Do not find yourself stuck without any savings plan when it is time to hang up your hat and retire. Start preparing for your future now. Ensure you can have the lifestyle you want and can live it comfortably.
Take time to review each retirement option for entrepreneurs. Choose the most cost-effective and beneficial retirement plan for your life and retirement goals.