Retirement Strategies for Small Business Owners

As a small business owner, your retirement planning strategies will likely differ from those of employees of big corporations. We discuss the best retirement strategies available to you.

Published April 28th, 2021

Reading Time: 4 minutes

Well-planned financial goals, whether they’re for the next week or 5 years from now, are integral to a one’s financial growth. These goals are what drive us to make savings plans, budgets, and investment strategies in order to reach them. Without a proper plan in place, achieving these goals is nearly impossible. This is especially true when it comes to retirement planning strategies. 

That said, retirement plans will differ depending on their financial situation, age, and goals. For instance, small business owners must develop retirement strategies that are different from those of employees of big corporations. Since business owners won’t have as much access to traditional retirement accounts, they should familiarize themselves with the different options available. It’s essential to choose the retirement account that’s best for their unique situation.

What are the Retirement Plans Available for Small Business Owners?

Each business owner’s situation is different. To better understand which retirement plan is ideal for each situation, it’s important to consider every option. These are the 5 main retirement plan options for those that are self-employed:

  • Traditional or Roth IRA 

Individual Retirement Accounts (IRAs) are best for new business owners who don’t plan on saving more than $6,000 a year. In a Traditional IRA, individuals can contribute pre-taxed dollars. The money then grows tax-free and is taxed as income after the age of 59 1/2. Roth IRAs, on the other hand, contain taxed dollars that are able to grow tax-free in the account. They can then be withdrawn tax-free after the age of 59 1/2.

  • SEP IRA

Simplified Employee Pension Plans allow business owners to contribute to traditional IRAs (SEP-IRAs) that have been set up for their employees. This type of retirement account is ideal for business owners with few to no employees. An SEP IRA is similar to a traditional Roth IRA, except the owner can make larger contributions; up to 25% of an employees compensation.

  • SIMPLE IRA

A Savings Incentive Match PLan for Employees (SIMPLE) plan is beneficial for large business owners who have up to 100 employees. SIMPLE Plan contributions are made to an employees traditional IRA account. Contributions to employee’s SIMPLE IRA accounts are deductible as a business expense.

  • Defined-Benefit Plan

A Defined-Benefit Plan is beneficial for self-employed people with high income and no employees. Employee benefits within a Defined-Benefit Plan are calculated by taking into account several factors, such as employment length and salary history. Employees become eligible to withdraw defined-benefit plan funds as a lifetime annuity or in some cases as a lump-sum at an age defined by the plan’s parameters. A business is responsible for managing the plan’s investments, unless they hire an outside wealth manager to take on the task. 

  • Solo 401(k)

A Solo 401(k) is best for business owners with no employees, not including their spouse. Business owners can contribute to this account both as an employee and an employer, therefore maximizing retirement contributions.

What is the best retirement plan if you are self-employed?

All of the accounts listed above can be great options depending on the dynamic of the individual’s business. One of the best options for small business owners is the solo 401(k). This account offers many advantages over other retirement accounts, such as high contribution limits. 

The other advantage is increased flexibility for an account owner regarding when they want to be taxed. Contributions made as an employer will be tax-deductible to the business. The money inside the account will then grow tax-free until it’s withdrawn.  Employee contributions, alternatively, have a different set of rules.  When the business owner makes a contribution as an employee, their taxable income for the year is typically reduced. These contributions can then grow tax-deferred and be taxed as ordinary income when they’re withdrawn during retirement.

How much can I contribute to my 401(k) if I’m self-employed?

As stated above, individual 401(k) plans have high contribution limits. This is because it allows individuals to make contributions as employees, as well as employers. As of 2020, contributions made as an employee cannot exceed $19,500 for anyone under 50 years old. Those that are 50 or older can contribute $26,000. Contributions made as an employer, though, allow the business owner to add 25% of their compensation from the business to this account. The yearly limit to this amount is $57,000, or $63,500 for individuals 50 or older.

Planning for Retirement with Zoe 

A comfortable retirement should be a goal for all business owners, whether you’re just getting started or quickly approaching retirement. Zoe  empowers all their clients to build a large enough “nest egg” so that they can save and retire comfortably, in line with their financial goals.

Zoe helps small business owners plan for retirement by connecting them with top financial advisors. Since every situation is different, we take the entirety of a business owner’s financial life into account during the matching process. Financial advisors in the Zoe Network are adept at helping clients choose retirement accounts that are ideal for their specific situation. 

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

Ready to Get Started?

Real financial planning should pay off today, and in 10 years' time.