Retirement Plans for Business Owners (2024)

Business owners are on the hook for a lot: the full 15.3% self-employment tax, the cost of healthcare, building your own nest egg without the matching employer contributions to retirement plans often referred to as “free money” for employees. It’s no wonder that investing for retirement isn’t a top priority for some business owners who are busy trying to grow their business’ value.

However, contributing to specific retirement vehicles can put more money in your pocket now with “above the line” tax deductions (regardless of whether you itemize on your return) and, in some cases, tax credits to offset the costs of starting a new plan, thanks to the original Secure Act and the enhanced Secure Act 2.0.   Between lower taxable income, the power of compounding to grow wealth, and tax-deferred growth on your contributions over time, retirement accounts quickly become a more appealing option than a savings account, taxable accounts, or hoping for the best when you sell your business.

Beyond the current and future financial benefits, getting serious about a retirement strategy will help you put a solid plan in place and provide a sense of security, given an unpredictable future.

The decision to take action and make a change in your saving habits is the first in a string of decisions, which we’ll walk through below. From there, you must decide which vehicle is right for you given your circumstances and goals, both immediate and longer-term.

If you own a business, here are 3 considerations to keep in mind when assessing retirement plans:

1. Do you have employees?

A solo 401(k) is a one-participant plan—meaning you can’t contribute to one if you have W-2 employees. You can only use this plan to cover yourself and your spouse if they earn income from the business.

With IRA-based plans (SEP & SIMPLE), you can contribute whether or not you have employees. However, you can’t exclude employees from the plan and you must make contributions to IRA-based plans at the same rate you do for yourself. (There is some flexibility with SIMPLE IRAs depending on the employer contribution method you choose.) Keep in mind that taking care of your employees pays off despite the short-term costs associated with retirement plan contributions—making contributions for employees should not be a deterrent from setting up a plan.

Defined Benefit plans allow business owners to make contributions for themselves and their employees, though the amounts will vary depending on actuarial calculations based on employee demographics (more on that below). This is much more complex than set contribution limits and rates with a 401(k) or IRA based plan.

2. How much will you realistically contribute?

The IRS limits contributions for 2024 to a maximum of $69,000 for an individual (there are catch up opportunities for business owners over 50 with IRA-based and 401(k) plans). Certain types of plans may have lower limits, as detailed below.

A SEP IRA allows you to contribute up to 25% of total compensation for an employee (remember you must contribute at the same rate for all employees), and 20% of net adjusted self-employment annual income for yourself.¹

You are limited to the LESSER of $69,000 or 25% of compensation (20% for self-employed business owners). So, if you’re self-employed and making less than $345,000, you will not be able to contribute the IRS maximum of $69,000 to a SEP IRA.

What if you want to contribute as close to the maximum amount as possible (up to $69,000), but your income is much less than $345,000? A solo 401(k) may be the better option. Contributions up to $23,000 are permitted as a salary deferral (assuming you earned at least that much), just like any other 401(k) plan. Business owners can contribute an additional amount as an “employer” contribution, up to the limit of $69,000 in 2024 depending on how much income you have. (This is again based on a percentage of net adjusted self-employment income.)

What if you are flush with cash and want to make larger contributions? A defined benefit plan may allow you to make significantly larger contributions, with amounts determined based on current age, compensation, and retirement age. These are typically best for those over the age of 50 without employees and businesses with substantial (and reliable) free cash flows since contributions must be made and there’s no discretion over the amount contributed.

What if you have employees and won’t be making large contributions for them or yourself? A SIMPLE IRA will allow you to make a 1-3% employer contribution and provide the opportunity for yourself and employees to save up to $16,000 in salary deferrals for 2024. The Secure Act 2.0, passed in 2022, may also create additional contribution options for business owners and their employees beginning in 2024.

3. What reporting requirements and amount of administrative tedium will you tolerate?

SEP, SIMPLE, and solo 401(k) plans tend to offer simplicity and few reporting requirements. They also do not offer the level of customization that comes with a larger employer plan.

IRA-based plans, like SEPs and SIMPLEs, can be set up using a prototype IRS form and do not require ongoing reporting to the IRS. Thus, they are low-cost to set up and maintain.

A solo 401(k) can also be set up with a simple prototype form or adoption agreement (i.e. turnkey solution), but this may come with a small fee depending on where the account is opened and if a third-party prototype is used. Once the plan assets exceed $250,000, annual IRS reporting is required using a simple form.

Defined benefit plans are much more complex and will require customized plan documents, substantial costs and administration, along with required annual funding determined by an actuary.

¹ Net adjusted self-employment income accounts for a deduction of one-half the self-employment tax and the amount contributed to a retirement plan (yes, you must include your contribution amount when trying to figure out what your compensation is for the purposes of making contributions). There are numerous calculators to help determine this, and your CPA can help!