Retirement Plans for Entrepreneurs

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When my self-employed clients reach a point of solid cash flow, I love exploring the idea of a retirement plan for their business. We quickly find out for self-employed individuals that a Roth IRA or Traditional IRA on its own for retirement savings simply won't cut it, primarily because of contribution limits. Let's say you aim to contribute 10% of your net income into a retirement account; you will run into issues as soon as you start profiting at least $75,000 from your business.

Additionally, Roth IRAs have income threshold limitations. If you’re single, you likely won’t have any issues until your adjusted gross income reaches $146,000. However, for my married couples, once your adjusted gross income reaches $230,000, your eligibility to contribute to a Roth IRA begins to diminish.

You could open a brokerage account and invest excess funds here. I love as a diversifier for types of investment accounts. But if you’re really looking to build wealth, be tax efficient, it’s likely time to start exploring retirement plans for your business.

So, is a business retirement plan right for you?

If you’re finding yourself having these thoughts, the answer is probably ‘yes’:

1. I want to save more than $7,000 per year towards my retirement
2. I want to be able to contribute to both pre-tax and after-tax accounts (aka Traditional & Roth)
3. I want to be more tax-efficient with my money
4. I want to build wealth

Here are some common types of retirement plans for business owners:

1. SEP IRA
   1. Allows for Employer contributions only
   2. Can contribute up to 25% of each employee’s compensation, up to $69,000 for 2024
   3. Usually low cost, easy to administer
   4. Contributions are flexible, so great for someone with varying cash flow
   5. Bottom line: Great for entrepreneurs with a handful of part-time employees
2. Individual/Solo 401(k)
   1. This is a one-participant plan, meaning it is designed for business owners with no employees (except for a spouse).
   2. Allows contributions at the employee and employer level, offering higher contribution limits.
   3. More costly than a SEP IRA and must follow ERISA guidelines.
   4. Bottom line: Ideal for a business owner with no employees.
3. Simple IRA
   1. For businesses with 100 employees or less and allows for employer and employee contributions.
   2. Higher contribution limits than a Traditional or Roth IRA, but not as high as other retirement plans. The employee contribution limit is $16,000 for 2024, with a $3,500 catchup contribution for those over 50
   3. Lower set-up and administrative costs compared to 401(k) plans
   4. Bottom line: great for entrepreneurs with employees looking to get started in a retirement plan
4. Traditional/Roth 401(k) or Safe Harbor 401(k)
   1. It offers both employee and employer contributions. Employees defer part of their salaries, and the employer offers some type of match.
   2. Higher contribution limits. Employees can contribute up to $23,000 for 2024, with catch-up contributions of $7,500 for those over 50
   3. Costs more to set up and administer than more retirement plans, and must follow ERISA guidelines.
   4. Bottom line: great for employers who want to recruit and retain employees

In summary, if you’re looking to build wealth, you have excess cash flow, and you want to be strategic from a tax standpoint, then implementing a retirement plan for your business is probably the right course of action. Book a call today to explore your options and see how RWP can help establish your small business retirement plan.