Let’s Talk Retirement for Small Business Owners

Dedicated small business owners understand retirement will look different for them than for people with more traditional trajectories. The pressing, everyday demands of managing a business can make retirement feel like a distraction to be handled in the future. However, focusing on retirement now may help both the owner and the business.

For example, an employer-sponsored retirement plan can benefit owners directly while attracting (and retaining) quality employees. Fortunately, the federal tax code offers several attractive retirement options tailored for small businesses. The best choice depends on various aspects such as company size, the employees' capacity to contribute annually, and administrative duties the business owner is ready to handle. Here are just a few options many of our clients with small businesses have used over the years.

Simplified Employee Pension IRAs

Say hello to the Simplified Employee Pension (SEP) IRA. As a business owner, this option allows you to contribute to IRAs for yourself and your employees and comes with certain advantages like flexibility and simplicity. However, like all IRAs, employees are unable to take loans from their plan.

SIMPLE IRA

Another option with a similar name is the SIMPLE IRA, which is designed specifically for sole proprietors and businesses with 100 or fewer employees. It presents a cost-efficient method for owners and employees to contribute to retirement. However, the pre-tax salary deferral limits in a 401(k) are higher, which may interest those looking for greater opportunities to contribute.

Small Business 401(k)s

New and enhanced tax credits for smaller employers can help make starting a 401(k)-retirement program more affordable than ever. This can allow for individual contributions on a pre-tax basis or through after-tax Roth contributions. In addition, a 401(k) can allow for flexibility and customization including matching, profit-sharing, or other special types of contributions.

Recent legislation created a substantial new startup tax credit to help small businesses shoulder the cost of building a retirement plan. This credit can reduce the amount of federal taxes that a small business may owe during each of the retirement program's first three years.

Know the Rules

This article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before implementing or modifying a retirement plan.

Distributions from SIMPLE-IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.

Much like SIMPLE-IRAs, SEP-IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.

With a 401(k), distributions start in the year you turn 73. Withdrawals are taxed as ordinary income, and, if taken before age 59½, may be subject to a 10 percent federal income tax penalty.

We’re Ready to Help

We understand that your business and retirement needs are unique. That's why we're ready to help you decide on the best retirement for you and your business. As financial professionals we are here to help you navigate these critical decisions.

Feel free to reach out to Deschutes when you're ready to discuss the elements of retirement for small business owners in more depth. Our firm has over 30 years of experience working with all types of retirement plans, and finding the right solution for you is truly our passion.

As a business owner your entrepreneurial spirit has built a thriving enterprise—let's bring that same can-do approach to your retirement journey. Contact Us Here to get started with a free consultation. 

^{Source: DOL.gov, November, 2023. "Choosing a Retirement Solution for Your Small Business"}