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Grow Your Business Finances

The Best Retirement Plan Options for Small Business Owners 2019

The Best Retirement Plan Options for Small Business Owners 2019
Credit: Andrey_Popov/Shutterstock

A recent study of 500 successful small business owners revealed that 51% hadn't paid themselves for several months so they could reinvest money back into their businesses. It's not just take-home pay that entrepreneurs sacrifice, often it's retirement savings as well. According to a Manta study, one-third of the nearly 2,000 small business owners surveyed don't have a retirement savings plan. 

I get it. When money is tight, it's hard to justify setting some aside for retirement, and if you have financing or debts to repay, getting out from under those obligations takes top priority – which is smart, since you're likely paying more in interest on money you owe than you would earn from savings in a retirement account. But, once you're in the black, you should prioritize saving for retirement. 

Admittedly, it's easier to contribute to a retirement savings plan when you're working for a larger company and it's part of the benefits package. But even though it takes more time and money to set up a retirement plan than to sign up for one, you have some good options to choose from. 

Several different types of small business retirement plans are available, and plan providers have affordable, accessible options designed for even very small businesses. There are also some tax advantages that can help offset the expense of sponsoring a small business retirement plan. 

You can choose from simple plans that anyone can open, plans designed for self-employed people with no employees, or employer-sponsored retirement plans for small businesses that employ anywhere from two to 100 workers. Read on to learn more about the small business retirement plan options that are available to you and some tips to help you decide which ones you want to discuss with your CPA or financial advisor. 

If you already know which type of plan you want, check out our best picks page to see which plan providers we recommend. 

Editor's note: Looking for the right employee retirement plan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

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The government offers a Retirement Plans Startup Costs Tax Credit to help small businesses offer retirement plans to their employees. It allows you to deduct up to 50% or $500 off plan startup and administration costs for the first three years of your plan. 

If you match or make contributions to employee accounts, that money is also tax-deductible.

It allows you to contribute to your own retirement savings plan, and like your employees, you have the option of elective deferrals that may allow you to lower your income tax bracket. Also, depending on your income, you may qualify for the Saver's Credit.

Additional tax credits may soon be available, as federal lawmakers seek to make retirement plans more accessible and affordable for small business owners. For example, one bill under consideration would provide a tax credit to small businesses that auto-enroll their workers in their retirement plans.

Here are some points to consider that may help you decide which type of retirement plan you want to explore. Scroll down or click on the links below to learn more about each type of plan. Because sponsoring a retirement plan for your small business is a big step, you should consult with your financial advisor and CPA for advice about which type is the best option for you and your business. Once you choose a plan type, you should call multiple companies to get pricing quotes specific to your business. 

If you have employees and want…

  • To set a vesting schedule that encourages employee retainment, check out a traditional 401(k).
  • To avoid nondiscrimination testing, so you and your highly compensated employees can aggressively save for retirement, think about a safe harbor 401(k).
  • A simple plan that allows your employees to make contributions, look into a SIMPLE IRA.
  • To choose which years you contribute to employee retirement accounts, for example, if your business profits fluctuate from year to year, consider a SEP IRA.

If you're a sole proprietor and want…

  • To save as much money for retirement as allowed and contribute as both an employee and the employer, look into a solo 401(k).
  • To save as much money for retirement as allowed, but only want to make employer contributions, check out a SEP IRA.
  • A simple retirement plan that's easy to set up, consider a traditional IRA.
  • A simple after-tax plan that allows your money to grow tax-free, look into a Roth IRA.

This is perhaps the most well-known type of retirement plan. The difference between IRA and 401(k) plans is that 401(k)s allow employees to contribute a higher dollar amount to their accounts, allow employees to take out loans from their retirement savings, and most offer employees a choice of pretax and Roth contributions. 

  • Cost per employee. Varies by plan provider. Look for all-inclusive providers that work with small businesses. Most charge a setup fee, monthly (or annual) administrative and per-participant fees, and an investment or advisory fee. Plan participants pay ETF and mutual fund expense ratios, as well as fund trades. 
  • Contribution structure. Employee participation is optional and often allows them to choose to make pretax contributions through salary deferrals or after-tax Roth contributions. Employer contributions are optional, but you can set a vesting schedule that allows you to reclaim a percentage of the business's contributions if an employee leaves the company before a set time. 
  • Roth 401(k) vs. traditional 401(k). A Roth 401(k) is a variation of the traditional 401(k) that allows plan participants to make after-tax contributions rather than pretax salary deferrals. After-tax contributions aren't deductible, since you've already paid income tax on them. But the advantage is that your money grows tax free so when you withdraw it, it isn't taxed. 
  • 2019 contribution limits are $19,000 for employees, or $25,000 for employees age 50 and older. Employers can contribute up to 25% of the employee's compensation, but the contribution totals (employee and employer contributions) must not exceed $56,000, or $62,000 for employees age 50 and older who make catch-up contributions. This plan, however, is subject to nondiscrimination testing, which ensures it doesn't favor highly compensated employees. As such, the business owner and high-earning employees may need to reduce their contributions to pass this test. 
  • Type of filing. You're required to submit an "Annual Return/Report of Employee Benefit Plan" – also known as IRS Form 5500 – with this plan. As mentioned in the point above, this plan requires nondiscrimination testing. 
  • Ideal for established small businesses who wish to use a vesting schedule to encourage talent retention or who prefer not to match or contribute to employee retirement accounts. 

A safe harbor 401(k) is a variation of the traditional 401(k) plan that isn't subject to an annual IRS nondiscrimination test. This allows the business owner and highly compensated employees to make maximum contributions to their retirement accounts. However, employers are required to match or contribute to employee retirement accounts, and these funds are immediately 100% vested. 

  • Cost per employee. Varies by plan provider, but those offering all-inclusive plans for small businesses tend to be less expensive. Most charge a setup fee, monthly (or annual) administrative and per-participant fees, and an investment or advisory fee. Plan participants pay ETF and mutual fund expense ratios, as well as fund trades. 
  • Contribution structure. Employee contributions are optional and, in most cases, they can choose between salary deferrals and Roth contributions. Employers are required to either match 4% for participating employees or contribute 3% to all eligible employees. Employer contributions are 100% vested. 
  • 2019 contribution limits are $19,000 for employees, or $25,000 for employees age 50 and older. Employers can contribute up to 25% of the employee's compensation, but the total contribution (including employee and employer contributions) must not exceed $56,000, or $62,000 for employees age 50 and older. 
  • Type of filing. Like the traditional 401(k), you're required to submit IRS Form 5500 with this plan. Nondiscrimination testing isn't required. 
  • Ideal for small businesses whose owners and high-earning employees want to invest aggressively in their retirement accounts. 

A solo 401(k) is a retirement savings plan designed for self-employed individuals who want to maximize their retirement contributions. It's also referred to as an individual 401(k) or i401(k). Only the business owner and his or her spouse may participate in this type of plan; business owners with employees do not qualify for it. 

  • Fees vary, depending on the plan provider. Some charge a setup fee and have monthly or annual administrative and advisory fees. Others don't charge these fees but instead have ETF and mutual fund expense ratios and trading commissions. Some retirement plan providers require a minimum opening investment and charge service fees if your account balance doesn't meet a certain threshold. 
  • Contribution structure. You can contribute to this account as both the employee and employer. A Roth option for the employee contribution may be available, depending on the plan provider. 
  • 2019 contribution limits are $19,000 for the employee contribution, plus an additional $6,000 catch-up contribution for if you're age 50 or over. The employer contribution limit is up to 25% of your compensation. However, the total defined contribution limit, which includes both employee and employer contributions, is $56,000 for 2019, or $62,000 with the catch-up contribution if you're age 50 or older. 
  • Type of filing. If your plan has $250,000 or more in assets, you must submit IRS Form 5500-SF or 5500-EZ. Because you don't have employees, nondiscrimination tests are not required. 
  • Ideal for sole proprietors who wish to take full advantage of retirement savings opportunities. 

A Savings Incentive Match Plan for Employees (SIMPLE IRA) is a small business retirement plan that is easy to set up, and has low contribution and matching requirements for employers. It allows employees to contribute more than they could with traditional or Roth IRAs. 

  • Cost per employee. There are usually no setup fees for this type of plan. Participating employees pay fund trades and expense ratios. Depending on the plan provider, there may be account service or maintenance fees. 
  • Contribution structure. Employees have the option of contributing to their accounts through elective deferrals. There is no Roth option for this plan. Employers must contribute either 2% to all employee accounts or match 3% of employee contributions. Contributions are 100% vested. Self-employed people who choose this plan can contribute to it both as employee and employer. 
  • 2019 contribution limit is $13,000 for employees, or $16,000 for employees age 50 and over. Employers aren't allowed to exceed the 2% contribution or 3% match. 
  • Type of filing. Doesn't require employers to file IRS form 5500 or submit to nondiscrimination testing. 
  • Ideal for small businesses with 100 or fewer employees that want to keep their costs low and allow employees contributions. 

A Simplified Employee Pension, or SEP IRA, is a retirement savings plan that's inexpensive for employers to establish and easy to maintain. Employer contributions aren't required annually, making it a good option for business owners who only want to contribute during high-profit years. 

  • Cost per employee. There are usually no setup fees for this type of plan. Plan participants pay trading commissions and fund expense ratios. Depending on the plan provider, there may be account service or maintenance fees. 
  • Contribution structure. Only employers may contribute to employee accounts. Contributions must be the same percentage of compensation for every participant. Employers aren't required to contribute to accounts every year. Contributions are immediately 100% vested. 
  • 2019 contribution limit is the lesser of $56,000 or 25% of the employee's compensation. There are no catch-up contributions allowed for this plan type. 
  • Type of filing. Doesn't require employers to file IRS form 5500 or submit to nondiscrimination testing. 
  • Ideal for businesses of all sizes that want a plan that's easy to set up and maintain, and allows employers the flexibility of choosing which years they make contributions to employee accounts. 

Individual retirement accounts (IRAs) are the simplest types of retirement accounts to set up. Furthermore, nearly everyone is eligible – freelancers, business owners, and even people who already have employer-sponsored retirement plans. This type of plan is a popular option for people who have 401(k) assets from previous jobs that they need to roll over into a new retirement account. There's usually no cost to set up an IRA, but you will pay trading fees and fund expense ratios. 

This type of retirement account allows you to make annual tax-deductible contributions, depending on your modified adjusted gross income and whether or not you have a workplace-sponsored account. Earnings on principal and interest accumulate on a tax-deferred basis. 

  • 2019 contribution limit is $6,000. If you're age 50 or older, you can make a $1,000 catch-up contribution. 
  • Contribution rules. You can contribute to your account until age 70 and a half at which time, required minimum distributions (RMDs) are mandatory. You can withdraw funds penalty-free at age 59 and a half. 
  • Ideal for individuals who anticipate that their tax rates will be lower during retirement years, as this account allows you to defer taxes until you withdraw your money. 

This type of retirement account differs from traditional IRAs in that contributions aren't deductible; rather, you've already paid income taxes on the money you invest, allowing interest to grow tax-free. It also has no age limits on contributions and has different withdrawal rules. 

  • 2019 contribution limit is $6,000. If you're age 50 or older, you can make a $1,000 catch-up contribution. 
  • Contribution rules. There's no age limit on contributions, so unlike traditional IRAs, you can continue contributing to your account past age 70 and a half. In addition to waiting until you're age 59 and a half to withdraw your funds, the account must have been established at least five years before you make withdrawals. There are, however, no RMDs during your lifetime. 
  • Ideal for individuals who expect tax rates to be higher during retirement years. Because Roth contributions have already been taxed, your money grows tax-free, and there are no additional taxes to pay when you withdraw it. 

Like all major financial decisions, consult your CPA, tax advisor or financial advisor for retirement and investment advice specific to you and your business. The information in this article is general and shouldn't be considered as financial, legal or tax advice. 

Ready to choose a retirement plan provider? Visit our best picks page to see our recommendations.

Editor's note: Considering an employee retirement plan for your business? If you're looking for information to help you choose the one that's right for you, use the questionnaire below to have our sister site BuyerZone provide you with information from a variety of vendors for free:

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Lori Fairbanks

I write about financial systems and services for small businesses (such as accounting software, credit card processing and point-of-sale systems) for Business.com and Business News Daily.