Home  |  About  |  Contact  |  Login  |  Open an Account

Small Business Retirement Plans

Many small business owners are self employed and have no W-2 employees (other than a spouse) who work more than 1000 hours per year. Small business owners who have this scenario frequently select the Individual 401k, SEP IRA, Defined Benefit Plan, or Simple IRA.

These small business retirement plans are popular because they offer high annual contribution limits and some plans permit loans. The Individual 401k permits tax free loans up to a maximum of $50,000. Learn more about how to obtain small business loans using an Individual 401k loan.

Are you a one person business, a business owner with a spouse as the only full time employee or a partnership with no W-2 employees?

Small business owners and self employed individuals typically select from four self employed retirement plans; the Individual 401k, SEP IRA, Defined Benefit Plan or Simple IRA.

When selecting from these self employed retirement plans the primary factors that determine which plan is appropriate are your age, annual income, your desired annual contribution and/or if you would like the option of a loan. Small business retirement plans benefit a small business owner differently depending on these factors.

SEP IRA

Features:

  • 2014 SEP IRA contribution limit maximum is $52,000.
  • Easy to set up and minimal administrative responsibilities.

Disadvantages:

  • An Individual 401k may provide a larger contribution compared to a SEP IRA at the same income level.
  • For those age 50+ there isn't an additional catch-up provision like there is with the Individual 401k.
  • Loans are not permitted

What are the advantages of a SEP IRA?

The SEP IRA has broad appeal due to its high maximum contribution limits and its ease to set up and maintain. The 2014 SEP IRA contribution limit maximum is $52,000. The annual contribution into a SEP IRA is based on a percentage of W-2 wages if you are incorporated or net income if you are a sole proprietorship. The SEP IRA is a great choice for self employed business owners who would like to contribute up to 25% of their W-2 wages or 20% of net self employment income.

S or C corporation or an LLC taxed as a corporation.

  • For incorporated businesses up to 25% of W-2 wages can be contributed into a SEP IRA.

Sole proprietorship, partnership or an LLC taxed as a sole proprietorship.

  • Annual contributions up to 20% of your net adjusted self employment income (or net adjusted business profits) can be contributed into a SEP IRA.

::  Back to Top

Individual 401k

Features:

  • 2014 Individual 401k contribution limit is $52,000 and $57,500 if age 50+ due to a "catch-up" provision.
  • Tax free loans are permitted with an Individual 401k plan. Loans are permitted up to 1/2 of the total value of the Individual 401k up to a maximum of $50,000.
  • Roth 401k - There is an option to make Roth 401k contributions with the salary deferral portion of the Individual 401k. Contributions into an Individual Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½.

Disadvantages:

  • Potentially greater administrative responsibilities and administrative fees compared to other self employed retirement plans.

What are the advantages of the Individual 401k?

The most popular self employed retirement plans are the SEP IRA and Individual 401k. Both retirement plans have high contribution limits and have completely discretionary annual funding requirements. In 2014 a SEP IRA has a maximum contribution limit of $52,000 and an Individual 401k has a contribution limit of $52,000 ($57,500 if age 50+).

A SEP IRA is easier to setup and has less administrative costs than an Individual 401k, however an Individual 401k may allow a greater contribution at the same income level due to the way the contribution is calculated.

After tax Roth contributions can be made into an Individual 401k. Roth 401k contributions are not tax deductible, but are received tax free when withdrawn after age 59 ½. SEP IRA contributions can only be made pre-tax and does not have a Roth option.

Another important distinction between these self employed retirement plans is an Individual 401k has a loan provision. IRS rules do not allow loans with a SEP IRA. Individual 401k loans are permitted up to 50% of the total 401k value with a $50,000 maximum.

::  Back to Top

Defined Benefit Plans

Features:

  • Depending on the age and income of the business owner, annual contributions can exceed $100,000 or more.
  • Loans may be permitted, however this may increase annual funding requirements.

Disadvantages:

  • More expensive to set up and to maintain.
  • Rigid annual funding requirements.

What are the advantages of a Defined Benefit Plan?

Do you want to contribute more than the contribution limits allowed by the SEP IRA or Individual 401k? Then consider a Defined Benefit Plan.

The Defined Benefit Plan is appropriate for those age 45 or older who wish to make tax deductible contributions in excess of the maximum limits of the Individual 401k or SEP IRA. Defined Benefit Plans offer substantial tax deductible retirement contributions and significant future retirement income. Depending on your age and income the annual contribution to a Defined Benefit Plan can exceed $100,000.

Defined Benefit Plans have greater administrative fees and more rigid annual funding requirements, but may be ideal for business owners who wish to shelter the largest percentage of their income and/or who want to make the largest retirement plan contribution permitted by IRS rules.

::  Back to Top

Simple IRA

Features:

  • A Simple IRA is easy to set up and has low administrative responsibilities.
  • Self employed individuals can elect to defer up to 100% of their income up to the 2014 Simple IRA contribution limit of $12,000 or $14,500 if age 50+. In addition there is a maximum 3% employer contribution.

Disadvantages:

  • Relatively low maximum annual contribution limits.
  • Loans are not permitted

What are the advantages of a Simple IRA?

Small business owners that have a Simple IRA are able to contribute up to 100% of their income up to the maximum contribution limits of $12,000 or $14,500 if age 50+. As a result, significant contributions can be made into a Simple IRA even at lower income levels. A good candidate for this plan doesn't mind the relatively low maximum contribution limits. Self employed individuals who would like to contribute in excess of the limits of a Simple IRA should consider an Individual 401k since it may allow a larger contribution.

::  Back to Top

Retirement Plans for the Self Employed

A one person business, a business owner with a spouse as the only full time employee, or a partnership can choose from the following retirement plans below.

Which of these self employed retirement plans is right for you?

In general, selecting the right retirement plan is determined by the dollar amount that you would like to contribute annually and/or if you would like the option of taking a loan. Each plan benefits a business owner differently depending on their income and their desired amount of contribution.

Use the calculator below and fill in your business type (sole proprietor or corporation), your age, and your income to determine the amount that you could contribute into each of these retirement plans. When inputting your yearly income use NET income if you are a sole proprietorship or W-2 wages if you are incorporated.

Name
Yearly Income
Age        Plan Year 
Choose Your
Business Type
Sole proprietorship, partnership (or LLC taxed as a sole proprietorship)
S corporation, C corporation (or LLC taxed as a corporation)
Powered by Pension Online

After running the calculator, which of these self employed retirement plans displays the annual retirement contribution that you wish to make?

This is likely to be the right plan for you. The last point of consideration is whether you wish to have the flexibility of taking a loan from the plan. Individual 401k plans and defined benefit plans may permit loans.

Comparison Table of Self Employed and Small Business Retirement Plans

  Individual 401k SEP IRA Defined Benefit Plans Simple IRA
Who is Eligible for this Retirement Plan?

Self employed individuals with no employees other than a spouse.

Sole Proprietors, LLCs, Partnerships, S and C Corporations.

Self employed individuals with no employees or small businesses with employees.

Sole Proprietors, LLCs, Partnerships, S and C Corporations.

Self employed individuals or small businesses owners with 5 or fewer full time employees.

Sole Proprietors, LLCs, Partnerships, S and C Corporations.

Companies with 100 or fewer employees.

Sole Proprietors, LLCs, Partnerships, S and C Corporations.

Key Retirement Plan Features

Provides benefits similar to a traditional 401(k) with less administration.

May permit greater contributions than SEP IRA, SIMPLE IRA or profit sharing plan without the rigid funding requirement of a Defined Benefit Plan.

Easy to administer, low-cost.

No IRS reporting required.

No annual funding required.

Employer must contribute to eligible employee accounts in any year that the plan is funded.

Provides the maximum allowable tax deductible retirement plan contribution.

Easy to administer, low-cost.

No IRS reporting required.

Largely funded by employee contributions, but limited employer contribution required.

Employee Contributions

Salary deferrals up to 100% of compensation up to $17,500 or $23,000 if age 50+ in 2014.

None

None

Up to 100% of compensation up to $12,000 or $14,500 if age 50+ in 2014.

Employer Contributions

Profit sharing contributions up to 25% of compensation.

2014 Individual 401k limit includes the salary deferral plus the profit sharing contribution with a combined limit of $52,000 or $57,500 if age 50+. 100% employer funded

100% employer funded

Up to 25% of compensation with a maximum of $52,000 in 2014.

100% employer funded

The annual contribution is calculated annually by an actuary.

Defined benefit plans provide the maximum allowable tax deductible retirement plan contribution.

Employer's have a mandatory match and must select from 1 of 2 matching formulas.

Match employee contributions dollar for dollar up to 3% up to a maximum of $12,000 in 2014 ($14,500 if age 50+).

A 2% match of employee compensation to all eligible employees regardless if the employee is electing to defer a portion of their salary or not (up to $5,200 in 2014). 

Required Administrative Filings and Responsibilities

Must file IRS Form 5500 when plan assets are greater than $250,000.

No employer tax filings.

Annually an actuary makes calculations to determine the amount that needs to be contributed into the plan to ensure the target retirement income goal is reached.

No employer tax filings.

Loan and Withdrawal Information

Tax free loans are permitted. 50% of the total 401k value can be borrowed up to a maximum of $50,000.

Withdrawals prior to age 59 ½ are permitted, but may be subject to a 10% penalty plus income taxes.

Hardship withdrawals are not permitted.

Loans are available if this feature is elected when the plan is adopted.

Receiving a loan may increase the annual required contribution.

Withdrawals prior to age 59 ½ are permitted, but may be subject to a 25% penalty if taken within the first 2 years of participating in a SIMPLE IRA. Also, an additional 10% penalty may apply for withdrawals prior to age 59 ½ in addition to ordinary income taxes.

Setup Deadlines

December 31st or fiscal year end.

Personal tax filing deadline if a sole proprietor plus extensions or the business tax filing deadline if incorporated plus extensions.

Must be set up by December 31st or fiscal year end.

Must be established by October 1st.

 

Are you a small business owner with full time employees?

Small business owners with full time employees generally select from retirement plans that fall into 3 categories.

  1. Retirement plans that are exclusively funded by the employer.
  2. Retirement plans that are employer and employee funded.
  3. Retirement plans that are exclusively employee funded .

Learn more about small business retirement plans available for small business owners with employees.

 

How Can BCM Help You?

Beacon Capital Management Advisors (BCM) is experienced in setting up retirement plans for our clients. BCM provides retirement plans to the self employed, freelancers, entrepreneurs, independent contractors and small business owners and is registered in 50 States. Complete the form below and a BCM Advisor will promptly respond to your inquiry.

Name
Telephone
Email Address
How can BCM help you?
*Safety and confidentiality are very important to us. Read our privacy policy.
|

 

Disclosures:

*The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

*Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.