Expert Retirement Plan Tips for Small Business Owners

31st Dec 2020

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Many self-employed, small business owners reinvest their earnings into their business instead of saving for retirement, which is common among business owners who are trying to grow their business.  It’s important for these entrepreneurs to keep in mind that retirement plans can have tax-deferred growth on earnings and as employers they can benefit from tax-deductible employer contributions. A recent Forbes article For Small Business Owners Only: Advanced Retirement Plan Options shares how small business owners can catch up on retirement with these savvy retirement plan solutions.

Defined Benefit Plan Vs. Defined Contribution Plan

Business owners who earn self-employment income should consider opening a Defined Benefit plan, which is similar to a personal pension plan, or a Defined Contribution plan such as a SEP-IRA to shelter the self-employment income from current taxes. While Defined Benefit plans are more complicated to open and require more administrative work to maintain, these plans allow for larger contributions averaging $100,000+ annually versus a Defined Contribution plan. Because Defined Benefit plans are more complex than Defined Contribution plans, it’s recommended to seek the help of a financial advisor. Get an estimate of your contribution and tax savings with our Defined Benefit calculator. 

Solo 401(k) Plans for Self-employed with No Employees

A Solo 401(k) plan is also a good option for a small business owner, if the business only employs the owner and spouse or has no employees who would be eligible to participate in the retirement plan.  The benefit of a Solo 401(k) account is that the amount you contribute is not a percentage of income like a Defined Benefit plan, but any amount you choose. A Solo 401(k) allows you an opportunity to set aside a large contribution into either a tax-deferred retirement account or the equivalent of a Roth option.

Benefits of a Cash Balance Pension Plan

A Cash Balance Pension plan is a good option for self-employed taxpayers who have a high income from self-employment because it allows for very high contribution limits for maximum tax-deferral and retirement savings, especially for people who are 45-65 years old. Cash Balance plans give business owners the potential to make very large deductible contributions for themselves – often $150,000+ annually – while limiting the total cost of benefits for employees. The employer manages the percent of contribution for the employees. If you’re a small business owner with 2-10 employees, download our illustration request form and we’ll design a free customized illustration.

If you’re interested in learning more about advanced retirement plan options for small business owners, read the full article.


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