Small-business retirement plans

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It is even better if you are self-employed
SEP-IRA
One-person 401(k)/Profit-Sharing plan
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It is even better if you are self-employed

Small business truly powers our economy; it is the engine that creates economic growth. Recognizing this, the government gives business owners the best tax breaks when it comes to retirement acccounts.

There are numerous types of retirement accounts that business owners can select. Lets look at two that will let you take action quickly.

the SEP IRA, which is regarded as the most straightforward and uncomplicated retirement account there is for self-employed people
the brand-new One-Person 401(k) Profit Sharing Account, which is really exciting

Other retirement accounts for business owners are

401(k)/Profit Sharing Accounts
Money Purchase Plans
Profit Sharing Plans
Defined Benefit Plans and
SIMPLE Plans

SEP-IRA

SEP - Simplified Employee Pension, otherwise known as a self-employed retirement account.

It is a retirement account for anyone who is self-employed, owns a business, or earns freelance income.

A Simplified Employee Pension (SEP) plan is a tax-advantaged retirement savings plan for self-employed individuals and business owners.. These plans may be an attractive option because they do not require many of the start-up and operating costs of other conventional employer-sponsored retirement plans. Additionally, a SEP plan allows business owners to contribute more to their retirement than a traditional IRA.

SEP-IRA contribution limits

Contributions made to an employee’s or self-employed individual’s SEP IRA account cannot exceed the lesser of:
1. 25% of the employee’s or self-employed individual’s eligible compensation, or
2. $69,000 for 2024 ($66,000 for 2023)
If you’re self-employed, your contributions are generally limited to 20% of your net income. (Net compensation for self-employed individuals is generally the net profit from IRS Schedule C reduced by the deductible self-employment tax. The eligible compensation limit, indexed for inflation by the IRS, is $330,000 for 2023 or $345,000 for 2024.) 
Contributions are deductible and aren’t required every year. 
SECURE 2.0 allows employers of SEP-IRAs to offer the ability to make Roth contributions. At this time, Vanguard will not be offering this option.

How’s that for Paying Yourself First?

For more information regarding SEP contributions, please visit the IRS website.

Don’t have to contribute every year

One benefit of SEP plans is that contributions do not need to be made every year. Therefore, you can choose to not contribute within a year if you’d prefer not to or are not in a position to do so.

Setting it up and automating it

You easily can set up a SEP by completing an IRS plan document. It will establish the allocation and eligibility rules. The IRS has certain minimum eligibility requirements: Participants must be 21 or older, have worked for the employer for at least three of the previous five years and receive at least $750 in compensation—though employers can be less restrictive if they want.

If you are self-employed and don’t have any employees, run - don’t walk - to the nearest bank or brokerage and open a SEP IRA today. The only slightly complicated part of the process is setting it up to work automatically. That is because, as a self-employed person, you probably don’t draw a regular salary. Still, as with the other retirement plans, the key to making this work is automation. So, it is worth taking the trouble to figure it out.

If you draw a regular salary

Set up your payroll system to automatically transfer contributions to your SEP IRA. This should be especially easy if you use a payroll company. As with the other plans, the idea should be to Pay Yourself First roughly 10% of your income - more if you want to be really rich. The SEP IRA rules permit you to go as high as 25%.

If you do not draw a regular salary

May self-employed people wait until most of their business expenses have been paid before they draw any salary or bonuses for themselves. If this is what you do, then you simply must make sure that every time you take money out of your business, you funnel the first 10% to your SEP IRA. As this may be difficult if not impossible to automate, try to pay yourself some sort of salary simply so you will not have to think about funding your plan.

Retirement plan startup costs tax credit

Establishing a SEP IRA for your business may allow you to claim the Retirement Plan Startup Costs Tax Credit. This credit is designed to help offset startup costs for small businesses that set up retirement plans for their employees, and it’s worth up to $5,000 per year for three years.

https://www.irs.gov/retirement-plans/one-participant-401k-plans

This plan is truly amazing.

Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $69,000 for 2024.

Check out this math.

Example: Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2020. He deferred $19,500 in regular elective deferrals plus $6,500 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2020 were $38,500. This is the maximum that can be contributed to the plan for Ben for 2019.

A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that his limits on elective deferrals are by person, not by plan. He must consider the limit for all elective deferrals he makes during a year.

Among the companies you can contact for details on these exciting new plans are

Aim Funds (aimfunds.com)
John Hancock Funds (jhancock.com) and
Pioneer Funds (pioneerfunds.com)

In most cases, it will cost you as little as $150 to open one of these plans. It takes about 20 minutes to sign up and automate everything.