Ultimate Guide to Retirement Accounts for Business Owners
Melissa Moss, CFP®
August 19, 2024
Read up on 2024's best retirement accounts for business owners!
I’ve always been a planner and wanted to think ahead about whether I’m on track (or ahead!) of schedule. But it was easier to know all of that when I was an employee than when I became a business owner. While I’ve fallen in love with the details of money, saving, investing, and financial planning, I know that’s not everyone’s cup of tea. So, that’s why I wanted to put together this list of retirement accounts—to make it simpler for other small business owners and solopreneurs to choose the retirement accounts that are best for them.
Owning your own business, whether you have employees or not, means that you get to choose which retirement accounts you use.
The problem with this is that there are so many options available which can get overwhelming and lead to doing nothing at all.
That is the worst.
Download the complete Flow Chart Bundle to Retirement Accounts for Small Business Owners here.
It might be life-changing to discover the right-fit retirement account for your business.
I especially like how choosing the right type of account can allow for optimization for income tax planning or maxing out the amount you set aside for retirement.
This post will look at the types of retirement accounts for small business owners and a few individual account types for outside of work so you can choose the mix that will support your long-term goals and dreams best.
Grab a cup of coffee, and let's dive into the Best Retirement Accounts for Business Owners!
Table of Contents
Solo 401(k)
401(k)
SIMPLE IRA (Savings Incentive Match Plan for Employees of Small Employers)
SEP IRA (Simplified Employee Pension IRA)
Traditional IRA
Roth IRA
HSA (Health Savings Account)
Taxable Account
Retirement Accounts for Small Business Owners
If you're a business owner who wants to choose the best retirement account type for your particular business but finds themselves lost among all the options.
#1. Solo 401(k)
A solo 401(k) is a retirement plan for individuals who own their own business and have no employees, or if you do, it’s your spouse. The Solo 401(k) has been around for a while, but several tweaks in the law have made it easier and more attractive than ever. Solo 401(k) has both pre-tax and Roth options.
Contribution Limits
You are able to contribute up to 25% of your salary or $69,000 in 2024 into your solo 401(k). As an employee, under age 50 you can put in up to $23,000 or 100% of earnings, whichever is less. If over 50, you can contribute an additional $7,500 as a catch-up contribution. On the employer side, you can contribute up to 25% of compensation, with a max total contribution of $69,000.
The Solo 401(k) is great for business owners who have no employees or just their spouse.
It’s also great if you plan to do a Mega Backdoor Roth Contribution. Click below for the Can I Make a Mega Backdoor Roth Contribution Flow Chart in the Flow Chart Bundle.
#2. 401(k)
A 401(k) is an employer-sponsored defined contribution plan. You can make contributions on a pre-tax basis, so it reduces your taxable income today. The IRS will get their cut when you withdraw your money in retirement, and your 401k will be taxed at your income tax rate in the future. With this type of retirement savings account, your employer has the option to match a certain amount of the contribution you put into it.
401(k)s may also be a Roth 401(k) with the option to pay income taxes on that money today for tax-free growth and withdrawals in the future.
Contribution Limits
As an employee, you are able to contribute up to $23,000 or 100% of earnings, whichever is less. If over 50, you can contribute an additional $7,500 as a catch-up contribution. If you are the employer or you have a generous employer, they can contribute up to 25% of compensation, with a max total contribution of $69,000.
Match Options as the Employer
You can choose to have no match, or a generous match. Whatever you choose, be sure to follow the Safe Harbor Rules.
#3. SIMPLE IRA (Savings Incentive Match Plan for Employees of Small Employers)
A SIMPLE IRA is for small businesses with less than 100 employees. It’s similar to a 401(k), but there are some differences.
Employees under age 50 may only defer up to $16,000 in 2024. Those age 50 or older may contribute an additional catch-up contribution of $3,500 for a total of $19,500.
The employer must either match dollar-for-dollar up to 3% of each employee’s compensation deferral, or 2% of each employee’s compensation regardless of matching.
For the SIMPLE IRA, all contributions are vested instantly.
#4. SEP IRA (Simplified Employee Pension)
A SEP IRA is a traditional IRA for self-employed people and small business owners. SEPs are best for small business owners with few or no employees because, if you have eligible employee participants, the IRS requires you to contribute to their SEP. The contribution to all employees must be an equal percentage of compensation to the business owner’s own contribution.
Contribution Limits
In 2024, the total max contribution to a SEP IRA is the lesser of 25% of compensation or $69,000.
SEP IRAs are simple and easy to administer. However, having one will not allow for a Mega- Backdoor Roth IRA due to the pro rata rule.
What I Think About These Options for Small Businesses
I really like the Solo 401(k) because of it’s allowance for high contributions. It also has low fees, pre-tax and Roth options, and can be really great for big savers. But it’s really only a good option for those who do not have any employees, or it’s just the business owner and a spouse.
For example:
E.g. 1) Salary is $40,000.
With a Solo 401(k), a business owner (of a single owner corporation) could contribute $23,000 on the employee side, and another $10,000 (25% of W-2 Income max of $276,000) for a total of $33,000.
E.g. 2) Salary is $400,000.
With a Solo 401(k), a business owner (of a single owner corporation) could contribute $23,000 on the employee side, and another $46,000 (25% of W-2 Income up to $276,000) for a total of $69,000.
Individual Investment Accounts Outside of Work
#5. Traditional IRA (Individual Retirement Account)
An IRA is a pre-tax retirement account available for those who have earned income. It has the same tax benefits as the 401(k) where your contributions reduce your taxable income this year, to be taxed upon withdrawal when you begin that after age 59.5.
One way that an IRA can be opened and contributed to without earned income is for a spousal IRA. If one spouse is the breadwinner and the other spouse has little to no income, the higher earning spouse can contribute to a Spousal IRA for the non-working spouse. The working spouse’s income must be equal to or greater than the total contributions for all IRAs.
Contribution Limits
In 2024, you can contribute the lesser of $7,000 or up to earned income.
It might be deductible if your income is under certain limits. Click below for the Can I Make A Deductible IRA Contribution Flow Chart in the Flow Chart Bundle.
#6. Roth IRA
You’ll pay taxes on your contribution this year, but your withdrawals will be tax free. This is a very popular account and so many love them, but there are income limits based on your MAGI (Modified Adjusted Gross Income), and you cannot do a straight Roth IRA if your MAGI is greater than a certain amount.
The spousal Roth IRA applies here, just as it does for the Traditional IRA.
The 2024 Contribution limit is the lesser of $7,000 or up to earned income.
The income limits are different if you’re single or married filing jointly. Click below for the Can I Contribute to My Roth IRA Flow Chart in the Flow Chart Bundle.
Take not that if you are above the income limit, the Backdoor Roth IRA may be a way to add to a Roth. It’s where you contribute post-tax dollars to a non-deductible IRA, then move it over to a Roth IRA.
#7. HSA (Health Savings Account)
An HSA is typically used for health care costs, but it can be used to save and invest funds for retirement or retirement health care costs. Costs can be incurred this year, but if you can cash-flow your medical expenses, then your invested assets can continue to grow and accrue over time, and you can withdraw those funds later aso long as you’ve saved the receipts.
HSAs are only available to contribute to in the years that you have a high-deductible health insurance plan that allows it.
There are contribution limits for the HSA. In 2024, individuals can contribute up to $4,150, and families (and 2 or more people) can contribute up to $8,300. Those 55 and older can contribute an additional $1,000 as a catch up contribution.
See Can I Make A Deductible Contribution To My HSA? In the Flow Chart Bundle.
#8. Taxable Account
A Taxable account doesn’t have any tax benefits, but it offers more flexibility and fewer restrictions than the tax-advantaged accounts we’ve covered above. This is money that you can access whenever you wish, but you’ll need to be mindful of long-term and short-term capital gains in this type of account. How you’ll be taxed will depend on how long you hold an asset in this type of account. You’ll pay ordinary income taxes on assets held less than a year, and capital gains rates for those held over a year. Capital gians rates are 0%, 15%, or 20%, and they depend upon your income.
There are no contribution limits to this type of account.
