Four Retirement Plans for Entrepreneurs
13th Feb 2020
It’s easier now than ever to become an entrepreneur. That said, today there are more entrepreneurs with about 550,000 people a month becoming entrepreneurs.
At Dedicated DB, our job is to help high-income, self employed individuals save on taxes and build wealth which we do by selling tax-advantaged retirement plans. Our clients are entrepreneurs, small business owners with a wide range of occupations. We have clients who are roofers, online coaches, YouTubers, consultants, designers and doctors.
We understand that most entrepreneurs are focused on their business and just want to get their enterprise off the ground. For busy entrepreneurs, retirement isn’t a high priority. It also may be not be feasible for an owner of a business that’s just getting started to open a retirement plan because of inconsistent income. However, if you’re an entrepreneur who wants to prepare for the future, the first step in retirement planning is to open a tax-advantaged retirement account such as a Defined Benefit or Cash Balance plan. Defined Benefit and Cash Balance retirement plans are a good solution for entrepreneurs because the plans allow you to catch up on your retirement – you can save aggressively for retirement by making very high contributions. The longer entrepreneurs put off contributing to a retirement plan, the further away they are from building a retirement nest egg.
Here are four retirement options for entrepreneurs.
1. SEP IRA
A Simplified Employee Pension IRA (SEP IRA) is a good option for self-employed individuals because you can contribute up to 25% of your annual earnings. You can also choose to contribute a smaller percentage of your compensation during less profitable years. In a SEP IRA, the employee’s annual contribution must match the employer’s. If you have had a profitable year, you can contribute the maximum 25% of your salary but you must do the same for all your employees, which can be a limiting factor for small businesses with employees. Contributions are tax-deductible and the SEP IRA also offers some funding flexibility.
2. Solo 401(k)
The Solo 401(k) is retirement plan that IRS calls a one-participant 401(k). Designed for self-employed individuals, this plan has similar features of an employer-sponsored plan but is designed for the self-employed. An example of part-time self-employed income is an individual who works for an employer, but also does a little consulting on the side. The consulting income would be considered self-employed income, which is eligible income for a Solo 401(k). Acting as your own employee, you’re able to contribute as much as $19,000 to your individual 401(k), or $25,000 if you’re over age 50. However, this plan is not available to additional employees; you can only use it you’re a sole proprietor or if your spouse works for you.
3. SIMPLE IRA
If you’re currently a solo entrepreneur, but seeking to add employees, a SIMPLE IRA may be a good fit. The SIMPLE IRA, which stands for Savings Incentive Math Plan for Employees Individual Retirement Account, is practical for small businesses because of its more affordable maintenance costs compared with other retirement plans. With this type of account, you can continue investing even after you’ve hired an employee, but you have to match your employees’ contributions, up to 3 percent of their salary. The contribution limit is no more than $13,000 a year or a catch-up contribution of $3,000 if you’re 50 or older.
4. Defined Benefit and Cash Balance Plans
Unlike other self-employed retirement plans, Defined Benefit and Cash Balance plans allow much larger contributions allowing late-to-save entrepreneurs to turbocharge their retirement. A DB and CB plan potentially allow the highest tax-deductible contributions, averaging more than $100,000 each year. These high contribution limits may also help lower your tax bracket. By reducing your adjusted gross income, you may qualify for the 20% deduction that’s eligible for qualified pass-through entities for LLCs, S-Corps, sole proprietorships and partnerships. Defined Benefit and Cash Balance retirement plans are ideal for entrepreneurs with less than 10 employees who earn consistently high incomes and who seek to maximize tax savings a