Email FacebookTwitterMenu burgerClose thin

Retirement Strategies for Small Business Owners

A business owner having reviewed a retirement plan for herself and her employees.

Whether you just launched your small business or have been running your own shop for years, it’s no secret that the hard work never ends. This holds true for retirement planning as well, and doing so with time is crucial for success. Fortunately, there are different tax-advantaged options available, including retirement vehicles that you can offer employees while maximizing your own account. However, the perfect fit depends on your specific circumstances, risk tolerance and business size. Here’s what you need to know.

If you own a business, a financial advisor could guide you in creating a retirement plan.

Retirement Accounts for Small Business Owners

Small business owners who want to set up a retirement account have several options to consider. Factors like the number of employees, contribution limits, investment options and administrative requirements differentiate these choices. As a result, your circumstances and preferences will help define the most suitable retirement plan for your business and personal financial goals. Here’s a a roundup of five retirement account for small business owners:

SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account)

SIMPLE IRAs are exclusive to small businesses with fewer than 100 employees. This IRA has a streamlined setup where both the employer and employees participate.

SIMPLE IRAs require every employee to enroll. The plan also requires matching contributions from the employer in one of two forms: One way is to match 100% of each employee’s contributions, up to 3% of their annual pay. Alternatively, you can contribute 2% of each employee’s pay (up to $345,000) regardless of each employee’s contributions.

Fortunately, employer contributions are tax-deductible, which could ease the financial burden for small business owners. Additionally, SIMPLE IRAs can be traditional or Roth accounts, providing more tax flexibility based on the owner’s preferences.

The contribution limit for SIMPLE IRAs is higher than traditional IRAs. Specifically, owners and employees can deposit $16,000 in their accounts in 2024. Participants age 50 and older can contribute an additional $3,500 of catch-up contributions for a total of $19,500 for the year.

Lastly, tax credits can defray SIMPLE IRA setup costs. Specifically, employers with 50 employees or less can qualify for a 100% credit for the costs of creating and managing the plan. The credit lowers to 50% for businesses with 51 to 100 employees. Plus, your business may qualify for a bonus credit of $1,000 per employee to offset the cost of matching contributions.

SEP IRA (Simplified Employee Pension Individual Retirement Account)

SEP IRAs share similarities with SIMPLE IRAs, including simplified management, tax-deductible contributions, potential tax credits and a Roth option. However, they have several crucial differences. For example, contributions come solely from the employer. Additionally, contributions aren’t necessary every year to maintain the account. 

Moreover, the savings potential of SEP IRAs is higher. For 2024, business owners can deposit up to 25% of their annual compensation or $69,000, whichever is less. 

SEP IRA contributions must also be equal for each worker. For example, if the business owner contributes 15% of their salary to their account, they must deposit 15% of each employee’s salary into the employee accounts. No catch-up contributions are allowed for employers or employees.

Conventional IRA (Individual Retirement Account)

A typical IRA is a personal retirement savings account available to all individuals, including small business owners. This option requires no participation from or contributions to employees. Instead, you open the account on your own, decide between a traditional and a Roth account, and make contributions every year. 

This account type is advantageous for owners who want less administrative hassle than a retirement plan for their entire workplace. However, the downside is the lower contribution limit. For 2024, you can contribute $7,000 to your IRA. While catch-up contributions of $1,000 are available to plan holders age 50 and older, the low maximum means it’s best to combine this tool with others to form a robust investment strategy.

Solo 401(k) 

401(k)s are also available in multiple forms. The solo 401(k) is for business owners who have no employees or work with a spouse only. Businesses with any other setup are ineligible. So, if you plan to hire employees in the future, this account isn’t feasible.

Solo 401(k)s have the same contribution limits as SEP IRAs, giving them more savings potential than conventional 401(k)s. To recap, the total limit is up to $69,000 in 2024, with an additional catch-up contribution of $7,500 for those 50 or older.

This retirement account also comes in the Roth variant, which can provide the option for after-tax contributions.  

Conventional 401(k)

A conventional 401(k) allows employees to participate in a retirement plan along with the business owner. The owner can offer matching contributions and decide between Roth and traditional variants. Owners can deduct matching contributions from their taxes up to 25% of total employee compensation and receive tax credits for setup costs.

Conventional 401(k)s have the same contribution limits for business owners as solo 401(k)s (which is $69,000 for 2024, and a catch-up of $7,500 for those 50 or older). 

Drawbacks to this option, however, include more administrative demands. The non-discrimination standards ensure the plan benefits all employees equally, and testing for fairness can be expensive and time-consuming.

How to Create a Retirement Savings Plan as a Business owner

Business owners reviewing a retirement plan for their business.

Creating a retirement savings plan as a business owner can involve these five common steps:

Set Achievable Goals for Retirement

Define your retirement goals, such as what age you want to step back, your retirement savings target and where you want to spend your golden years. Additionally, it’s crucial to consider factors such as lifestyle, travel and healthcare expenses, as they will determine your annual expenses. The more accurate a picture you have of retirement, the better you can pursue your goals. 

Assess Your Business’s Value

While 401(k)s and IRAs are excellent retirement savings vehicles, your business is also a key asset. Selling it at the right time can help ensure the cash flow and lifestyle you want during retirement. Even if you want to close your business when you retire, the equipment and real estate from the shuttered business have cash value. 

For these reasons, it’s essential to get an appraisal of your business. Understanding the market value for your business and its component parts can help you decide how to time your retirement. Gathering data on recent sales of similar businesses can also help you estimate your business’s value as well. Fortunately, a business broker can provide these services and facilitate the sale of your business.

You may also benefit from hiring a financial advisor, like a CPA, to help you understand the implications of selling your business. For example, selling may incur long-term capital gains taxes. This means you can owe up to 20% of your income from that sale. 

Lastly, you have different options for selling. You could sell to a larger corporation, make a deal with an aspiring business owner or entrepreneur, pass the business on to a family member, or allow your employees to buy in through an ESOP (employee stock ownership plan). Each choice has different ramifications, including how you’ll profit from the sale.

Make a Succession Plan

An exit strategy centered around succession can help your business avoid disaster when you step back. Doing so means selecting an employee or making an outside hire to choose the next owner/manager for your company.

It’s recommended to implement this process ahead of time to allow your successor to shadow you, gain insight and receive advice. You could also step back into an advisory role for your successor’s first several months to transition gradually instead of a sudden break. 

Additionally, it’s advisable to streamline or formalize business practices to ensure the business continues to run smoothly. Whether you need to implement a defined hiring process, document your business strategy, or solidify relationships with suppliers, it’s crucial a task to organize operations.

Diversify Your Portfolio

Spreading your investments among different assets is important to protect your retirement savings. Therefore, it’s advisable to allocate your hard-earned savings across various savings vehicles. 

Remember, reducing your risk threshold as you near retirement helps maintain the gains you’ve made during your working years. Diversification performs this vital task, as does picking more stable investments, such as mutual funds, ETFs and bonds.

Update and Change Your Plan Along the Way

Life brings changes regardless of your stage of life, including retirement. Fortunately, a retirement plan isn’t set in stone. You should update it and make necessary changes as your circumstances and goals develop.

So, whether you realize you want to downsize upon retiring or a health condition changes the support you’ll need, adjust your plan according to where life takes you. Your plan should reflect changes in your business, personal life and financial situation.

How to Boost Your Retirement Savings as a Business Owner

Boosting your retirement savings as a business owner requires strategic planning and disciplined financial management. Here are seven effective strategies to enhance your retirement savings:

  • Start saving early: Begin saving for retirement as early as possible to take advantage of compounding returns. The longer your money is invested, the more time it has to grow.
  • Set goals: Establish clear and realistic retirement savings goals. Break down your goals into short-term and long-term targets, making it easier to track progress.
  • Use catch-up contributions: If you have a traditional IRA, take advantage of catch-up contributions available for individuals aged 50 and older. This allows you to contribute $1,000 more to your account each year. 
  • Make annual savings a top budget item: Prioritize retirement savings in your annual budget. Treat your retirement contributions as non-negotiable expenses, similar to other fixed costs.
  • Choose assets other than your business: Reinvesting every extra dollar you have in your business can be tempting. But, spreading your money around will help manage risk and potentially increase returns.
  • Extend your career: Consider working beyond the typical retirement age if feasible. Continuing to earn income allows you to delay tapping into your retirement savings, giving your nest egg more time to grow.

Bottom Line

A couple selecting a retirement plan for their business.

Small business owners have a variety of retirement account options to choose from, each with its own advantages and considerations. The decision on which plan to adopt depends on specific factors like the size of your business, the number of employees and your individual preferences. Common options include a SIMPLE IRA, SEP IRA, Conventional IRA, Solo 401(k) and a traditional 401(k). Business owners can select the plan that aligns best with their financial goals and circumstances.

Tips for Retirement for Small Business Owners

  • A financial advisor can help you assess the value of your business and tailor a retirement plan for your situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SEP IRAs and solo 401(k)s both provide boosted investment maximums. If you’re struggling to decide between the two, here’s a comparison.

Photo credit: ©, ©, ©