Solo 401(k)s, SEP and SIMPLE IRAs are great retirement plans for small business owners and self-employed individuals to capture tax-advantaged retirement savings for themselves and employees. These plans can be self-directed, allowing account owners to make their own investment choices and use alternative assets to grow retirement wealth.
It’s challenging for individuals who work for small businesses to save for retirement.
One reason for this challenge is the lack of pension and/or employer-sponsored retirement plans. The costs of retirement accounts can be somewhat expensive for small employers, so they are often unable to offer them. But SEP and SIMPLE IRAs are two relatively low-cost, easy to manage retirement plans designed just for small business owners and sole proprietors. Solo 401(k)s offer another option for people who own a business with no employees besides themselves, spouses, and/or business partners.
Powerful Advantages 401(k)s, SEP and SIMPLE IRAs for Small Business Owners
SEP and SIMPLE IRAs for small busines owners offer some of the same advantages. Each have larger contribution limits than traditional or Roth IRAs. Both offer cost-effective benefits to help employers attract and retain valuable workers who desire retirement savings plans.
Solo 401(k)s also offer higher contribution limits than most other retirement plans. You’re able to make contributions as an employee and as an employer, which can have a big impact in growing retirement savings.
An even greater advantage of all of these plans is that they can be self-directed. Self-directed retirement plans allow investments in many diverse alternative assets. Alternative investments (like real estate) can potentially build retirement wealth you desire faster than you might with typical plans that hold only traditional assets (stocks, bonds, mutual funds). When you use a self-directed SEP, a self-directed SIMPLE IRA, or a self-directed solo 401(k), you choose your own assets for your plan. This gives you even greater control over your retirement funds.
Advanta IRA understands the challenges small employers face when choosing retirement plans. Below we provide a comparison of these three retirement plans for small business owners to help you decide which plan is right for you and your business. The benefits described apply to self-directed plans, too.
Savings Incentive Match Plan for Employees (SIMPLE IRAs)
SIMPLE IRAs are beneficial for small businesses with fewer than 100 employees. These plans have minimal start-up and administrative costs compared to some other plans. Employers who offer SIMPLE IRAs enjoy the benefits of reducing business taxes and the flexibility of deciding how much they contribute to their employees’ plans.
Basics of SIMPLE IRAs:
- Contributions include both employee salary reduction contributions, as well as either employer matching contributions or non-elective contributions.
- Employees can contribute up to $13,500 in 2021 ($14,000 in 2022) with an additional catch-up contribution of $3,000 for those aged 50 and older.
- Employers can match employees’ contributions dollar-for-dollar of up to 3 percent of the employees’ deferral contributions or they can make non-elective contributions of up to 2 percent of an employee’s compensation.
- Contributions grow tax-free, and taxes are paid on distribution at retirement based on the applicable tax rate at that time.
There is a deadline for opening a SIMPLE IRA. This plan must be established between January 1 and October 1 in the year you want contributions to count on your tax return. So, you have until October 1, 2021 to establish an account for this tax-reporting year or until October 1, 2023 for the 2022 tax-reporting year.
Simplified Employee Pension Plans (SEP IRAs)
SEP IRAs are great retirement savings plans for self-employed individuals and partners or owners of corporations who typically hire less than 25 employees. This plan is affordable for employers and allows employees to make contributions to IRAs held at institutions of their choice. These plans have high contribution limits, giving account owners ample capital to invest.
Basics of SEP IRAs:
- SEP IRAs have lower start-up fees and operating costs than 401(k)s and other profit-sharing savings plans.
- All employees must receive the same benefits, but employers are not locked into making contributions every year.
- Employers can make a contribution of up to 25 percent of each employee’s compensation.
- Employer contributions are tax deductible for their business.
- The annual 2022 contribution limit is $61,000, not to exceed 25 percent of an employee’s compensation.
- Distributions are taxed upon withdrawals which can be taken after the participant reaches the age of 59 ½.
There are special rules regarding contributions for self-employed individuals who are also considered employees relevant to SEP IRAs. Contact a financial professional for more information on complying with IRA regulations regarding contributions and other details.
Also, you have until April 15 to establish a SEP IRA to count towards your tax-reporting year. So, you can open an account before April 15, 2023 for contributions to apply to your 2022 income tax return.
Solo 401(k)s
Solo 401(k)s are beneficial retirement plans for small business owners who want the same advantages these accounts offer employees of larger corporations. You can even use a solo 401(k) if you have a side business apart from a full-time job with an employer. The fact that you can make pre-tax employer and employee contributions into your account make these attractive retirement plans for small business owners.
Basics of solo 401(k)s:
- Employee contribution to solo 401(k)s for 2022 is $20,500 and the employer contribution can be up to 25 percent of the employee’s compensation.
- Employees aged 50 and over have a catch-up contribution allowance of up to $6,500 a year.
- The employer contribution is a tax deduction for the business.
- You can use Roth and mega Roth options that allow you to maximize your employee contributions. Discuss these options with your plan administrator as these features impact whether contributions are made with pre-tax or post-tax dollars.
- You can personally borrow up to 50 percent (or up to $50,000) of your solo 401(k).
Most people chose to open their solo 401(k) accounts by December 31st so they don’t miss the deadline, but you have until your income tax filing date, including extensions, to open a plan and make employer contributions to a solo 401(k). Consult with your CPA or other advisor for guidance as to when you should open the account to maximize the full amount of your employee portion, as employee W-2s are due on January 31.
Self-Direct Solo 401(k), SEP and SIMPLE IRAs to Gain Access to Alternative Investments
Self-directed retirement plans are perfect for individuals who want control of their investing funds and decisions, offering a hands-on approach to building wealth. Many small business owners and self-employed individuals look beyond traditional stocks, bonds, and mutual funds for investment opportunities.
A self-directed SEP or SIMPLE IRA opens the door to diverse, alternative investments while providing a higher contribution limit, as well. Investing in assets you know and understand can provide a level of comfort and possibly increase your chances for building wealth at a faster rate than traditional options allow.
Popular examples of alternative assets:
- Real estate
- Private lending
- LLCs
- Foreign exchange and futures trading
- Cryptocurrency
- Oil and gas options
- Tax liens and certificates
- Precious metals
- And more…
These are only a few of the almost unlimited alternative assets available for self-directing. This offers you the flexibility to choose what’s right for you while maintaining control of your savings plan.
Want to Offer a Self-Directed IRA for Your Employees?
SEP and SIMPLE IRAs for small business owners are definitely worth consideration. But they aren’t the only savings plans available to you. You can also self-direct a health savings account (HSA) to build tax-advantaged savings to pay for qualified medical costs.
And, if you decide to offer a self-directed savings plan for your business, Advanta IRA makes it easy. We ensure the administrative details of our clients’ plans comply with IRS regulations. We do not sell investments or give investment advice, so our clients have the complete control to choose their own assets for their plans.
To learn more about how you can use self-directed savings plans like solo 401(k)s, SEP and SIMPLE IRAs and take advantage of the savings for yourself and qualified employees, contact Advanta IRA today.
This article was originally published in July 2017 but has been updated with current information.
