As a small business owner, choosing the correct retirement plan can set you and your employees up for a secure financial future. Choosing the wrong plan, however, often leads to unwanted headaches and missed opportunities.

Three main factors often determine what plan works best.

1. The number of employees the business has.
2. Your income from the business & how much you want to save.
3. Consistency of profits & cash flow.

Use our retirement plan map & summaries below to take the first step to choosing the correct plan!

Map out what retirement plan works best for your business:^*

     *This chart is a generalization. Consult with a financial professional before setting up any plans.

Plans for business owners with no or few employees:

Individual (or Solo) 401(k)

• Key benefits
  • Offer the same benefits as a traditional 401(k) plan, except this is only available to businesses with no employees other than the owner & the owner’s spouse.
  • Ability to fund both the “employee” and “employer” contributions up to the annual limit.
• 2024 Contribution limits
  • $23,000 employee contribution limit.
  • $7,500 catch-up for individuals age 50 or older.
  • $69,000 ($76,500 including catch-up) total annual limit.
    • Includes employee & employer contributions.
    • Employer contributions are limited to 25% of your compensation.
  • Downsides
    • Unable to set up if you have any employees.
    • Some paperwork is required – Form 5500 will need to be completed annually with the IRS once assets in the plan reach $250,000.
  • Who is it best for?
    • Self-employed individuals looking for an option that may allow them to save more than other retirement plans.

SEP-IRA

• Key benefits
  • Simplicity – requires less maintenance than 401(k) plans.
  • Annual contributions are not required.
  • Contributions to the business owner and employees are tax deductible by the business.
• 2024 Contribution limits
  • Up to 25% of compensation or $69,000, whichever is less.
  • Funded with employer contributions only.
• Downsides
  • Owners that contribute to their own account must contribute the same percentage of compensation to each eligible employee’s account.
    • For owners looking to make large annual contributions must plan on making the same contribution for all employees.
  • Who is it best for?
    • Self-employed individuals looking for an option that may allow them to save more than other retirement plans.
    • Self-employed individuals who want to fund their retirement through the business rather than personal income.

Cash-balance pension plans

• Key benefits
  • Cash-balance plans are defined benefit plans that have a similar “look and feel” as a 401(k) plan in that they have account balances.
  • Significantly higher contributions allowed vs other retirement plans.
  • Business owners can contribute to a cash-balance plan in addition to a 401(k) plan.
• 2024 Contribution limits
  • Contributions depend on the business owner’s compensation and age.
  • For self-employed individuals, maximum contributions usually range from $100,000 to $350,000.
• Downsides
  • Plan administration is expensive.
    • Actuaries are needed to determine proper funding and avoid excise taxes if minimum contributions are not met.
  • The company makes contributions for all employees. Therefore, if employees are involved, it works best if there are few employees, who are young and not highly compensated.
  • The IRS views these plans as long-term plans and generally require plans to be in place for five to seven years, and contributions must be made annually.
  • Changing contributions requires a documented business reason.
• Who is it best for?
  • Smaller enterprises, small business owners, self-employed individuals with significant income.
    • Owners making less than around $350,000 annually likely won’t see much of a benefit.

Plans for business owners with employees:

401(k) Plans

• Key benefits
  • 401(k) plans are the most well-known retirement plans for good reason – 401(k)s provide the most flexibility for both the owners and their employees.
    • Employees determine and fund their own contributions.
    • Matching & profit-sharing contributions are elective.
    • Many allow automatic enrollment.
  • Tax-advantaged retirement savings for both owners & employees.
  • Participants have access to borrow from their account balance.
  • Ability to allow traditional pre-tax or Roth contributions.
• 2024 Contribution limits:
  • $23,000 employee contribution limit.
  • $7,500 catch-up for individuals age 50 or older.
  • $69,000 ($76,500 including catch-up) total annual limit.
    • Includes employee & employer contributions.
  • Downsides
    • Requires more administrative work.
      • Plans are subject to annual tests to ensure benefits do not discriminate in favor of highly compensated employees.
      • Many businesses choose to hire a third-party administrator to complete IRS requirements. This adds to the total cost of maintaining the plan.
    • Who is it best for?
      • Owners who want to extend retirement savings opportunities to their employees.
      • Owners looking for greater plan customization.
      • Typically, a business with strong, steady cash flow & profits that allow the company to help fund matching & profit-sharing opportunities.

SIMPLE IRA

• Key benefits
  • Although the name is actually an acronym (Savings Incentive Match Plan for Employees of Small Employers), simple is a very fitting name.
    • SIMPLE IRAs have fewer rules and requirements, making them much less complicated to administer.
  • Allows both employees & employers to contribute to retirement funding.
• 2024 Contribution limits
  • $16,000 elective deferral limit.
  • $3,500 catch-up for individuals age 50 or older.
• Downsides
  • Required by law to match employee contributions.
    • Employers have two options for providing matching contributions.
      • Matching contributions up to 3% of the employee’s salary.
      • Make 2% contributions regardless of the employee’s contributions.
    • Matching contributions are immediately vested, and employees can take the funds with them whenever they leave.
      • No incentive for employees to stay with the firm for the long-term.
    • Lower contribution limits than other retirement plan options.
  • Who is it best for?
    • Small businesses with at least one employee.
    • Owners looking for an option with low start-up and ongoing operating costs.

Other retirement funding options:

Personal IRAs

• Key benefits
  • Flexibility and not committed to funding for yourself or employees.
• 2024 Contribution limits
  • $7,000
  • $1,000 catch-up for individuals age 50 or older.
• Downsides
  • Low contribution limits.
  • Low-income limits for tax deductibility.

Taxable Brokerage Accounts

• Key benefits
  • Flexibility and not committed to funding for yourself or employees.
  • No limit on contributions.
• 2023 Contribution limits
  • No limit.
• Downsides
  • No tax-deferral benefits .

Disclaimer: This article is an informational guide. Consult with a financial professional before setting up any plans.