Whether you’ve just started your professional journey as a business owner or you’ve spent years in the workforce and have decided to become self-employed, there are several tasks you’ll need to accomplish to ensure your success. From seeing up your phone lines and computers to looking at future financial plans for your business, you may feel like there’s just not enough time to get everything done.
However, when you’re setting up your new company, one of the most important things to keep in mind is your retirement account. This may not be the first thing on your mind if you’re starting your business in your 20s or 30s. But that doesn’t mean it’s too early to put a plan in place to ensure you can retire comfortably. You don’t want to succeed in your business and not have anything to show for it once it’s time to retire.
Even though you don’t have the support of a company plan to help you organize your retirement, there are several retirement account options for small business owners and self-employed individuals. These options offer everything you need to retire whether you work independently or you’re a small business owner with employees. After all, providing an appealing retirement plan can be an effective way to attract the right team members.
Here are three of the most common forms of retirement plans recommended by financial advisors for small business owners and entrepreneurs.
SEP IRA
SEP or Simplified Employee Pension is a popular type of IRA for entrepreneurs and self-employed works. This account is easy to open and the annual fees are low — sometimes there are no yearly fees. The rules for this IRA are simple as well. You can invest up to 25% of your net income up to a limit that will change according to inflation rates. The cap for 2020 is $57,000 and $58,000 for 2021.
All contributions to a SEP IRA are tax-deductible and this account offers flexibility for funding. You can wait until you’ve filed your taxes to fund the IRA. This way, if your income is higher than you anticipated, you can make a bigger contribution and reduce your tax bill. If you have team members, they are not permitted to contribute to the account, but they can make personal contributions in a traditional Roth IRA.
SIMPLE IRA
The SIMPLE, or Savings Incentive Match Plan for Employees IRA, is ideal if you’re running a company but want to expand your business. With this retirement account, you can keep investing after you’ve hired employees. However, you have to match any contributions your employees make to their retirement accounts up to 3%. The annual contribution limit is $13,500; if you’re 50 or older the limit is $16,500 for 2020 and 2021. You can withdraw from the account after the account has been open for at least two years, but there will be a 25% penalty.
Individual 401K
If you want to grow your retirement account quickly and you have a significant sum of money to contribute, you may want to go with a 401K. This retirement account works similar to a traditional 401K and your spouse can join this plan as well. You’ll act as your own employee and you can add as much as $19,500 to an individual 401K. If you’re over 50, you can contribute $26,000 in 2020 and 2021. This retirement plan option is not available to your workers. You can only use the individual 401K if your spouse works with you or you’re a sole proprietor.
When you’re your own boss, you can give an additional 25% of earnings in addition to your employee contribution to a $57,000 maximum for 2020 and $58,000 for 2021. Since there are no other limits to your contributions, you can make them when your company is doing well to compensate for the years when you couldn’t make larger contributions.
If your spouse is on the retirement plan with you, you may be able to double your contributions if both of you are over the age of 50. This retirement account is advantageous if you may need to take out a business loan.
All in all, if you’re a self-employees, these retirement plans are low-cost and simple to maintain to help you prepare for retirement. When comparing plans, think about your investment options and the fees attached to them, and consider whether you need retirement accounts that will cover your employees. Be sure to speak with your financial advisor to determine the plan that will work best for you and your company.