Small Business IRAs: Why Small Biz Owners Need to Think About Retirement Now
With an abundance of challenges to juggle—managing employees, satisfying customers, keeping the lights on—small business IRAs might have slipped your mind! Amid this chaos, it’s easy to push retirement planning to the back burner. However, helping secure your financial future is not just a good idea; it’s essential. Some IRAs are available to individuals, and some are specifically tailored for small business owners like you. Whether you’re a sole proprietor, running a small team, or have dreams of expansion, there’s an IRA out there designed to meet your needs. Guest blogger, Nichole Coyle, CFP® CSLP®, is back to demonstrate how an Individual Retirement Account (IRA) can help you build a nest egg while providing tax benefits today.
What is an IRA?
An IRA is a type of savings account designed to help individuals save for retirement, offering various tax advantages. Unlike your regular savings account, IRAs are specifically earmarked for retirement, meaning there are some rules and restrictions around contributions and withdrawals. But don’t let that scare you—these restrictions come with potential benefits that can make a world of difference in your retirement savings.
Small business IRAs offer a flexible way to save for the future and may not have the complexity or higher costs of other retirement plans, like 401(k)s.
How Are Small Business IRAs Different?
There are several types of IRAs to consider, each with its own unique features, benefits, and limitations. Here’s a breakdown of the most popular options for small business owners:
Traditional IRA
- Tax Benefits: Contributions are often tax-deductible, meaning you can lower your taxable income in the year you contribute. There are limits based on your modified adjusted gross income (MAGI) and whether or not you (and/or your spouse) actively participate in an employer-sponsored retirement plan.
- Contribution Limits: As of 2024, you can contribute up to $7,000 annually if you’re under 50, and $8,000 if you’re 50 or older.
- Ideal For: Business owners who anticipate being in a lower tax bracket during retirement.
Roth IRA
- Tax Benefits: Contributions are made with after-tax dollars, but your withdrawals during retirement are tax-free.
- Contribution Limits: Same as the Traditional IRA, but with income restrictions that may limit eligibility.
- Ideal For: Those who expect to be in a higher tax bracket when they retire or want tax-free income in retirement.
SEP IRA (Simplified Employee Pension)
- Tax Benefits: Contributions are tax-deductible, and the business can contribute up to 25% of an employee’s compensation, or $69,000 (as of 2024), whichever is less. Beginning in 2023 Roth contributions are now possible within a SEP IRA (these contributions are NOT tax-deductible).
- Contribution Limits: Much higher than Traditional or Roth IRAs, making it a strong option for maximizing retirement savings. As of 2024, the contributions an employer can make to an employee’s SEP-IRA cannot exceed the lesser of:
- 25% of the employee’s compensation, or
- $69,000 for 2024 ($66,000 for 2023, $61,000 for 2022, $58,000 for 2021 and $57,000 for 2020)
- Note: Elective salary deferrals and catch-up contributions are not permitted in SEP plans.
- Ideal For: Sole proprietors or small business owners with a few employees who want a straightforward, high-contribution retirement plan.
- Added Info: Only employers can make contributions to these plans, employees cannot. Contributions are immediately vested and must be the same percentage for all eligible employees, including the owner. Employer contributions can vary or not be made at all, at the employer’s discretion. Factors may include the company’s profitability, cash flow, etc.
SIMPLE IRA (Savings Incentive Match Plan for Employees)
- Tax Benefits: Contributions are tax-deductible. Employers must either match employee contributions or contribute a fixed percentage. As of 2023, SIMPLE IRA plans can now include Roth contributions (these contributions are NOT tax-deductible).
- Contribution Limits: As of 2024, employees can contribute up to $16,000, with an additional $3,500 catch-up contribution for those 50 and older.
- Ideal For: Any size businesses looking for an easy-to-administer retirement plan with matching contributions.
- Added Info: SIMPLE IRAs have a mandatory employer contribution, even if the business has a difficult year. While the employer is required to make contributions, employees have the option to contribute (unlike SEP IRAs) and can stop at any time. All eligible employees must be enrolled in the SIMPLE IRA and the employer must make contributions to each eligible employee’s account every year.
How to Choose the Right Small Business IRA for You
The choice between small business IRAs depends on your business structure, financial goals, and whether you have employees. Here’s a quick checklist to help you decide:
- Sole Proprietor or single member LLC: A SEP IRA might be your best bet due to its high contribution limits and simplicity. If you hire employees, once eligible, you will need to include them in the plan and make the same percentage contributions as your own.
- Looking for Tax-Free Withdrawals: Consider a Roth IRA, Roth SEP IRA, or a Roth SIMPLE IRA especially if you’re confident your income will grow.
- Have Employees: A SIMPLE IRA offers a straightforward way to contribute to both your retirement and that of your employees while allowing your employees the option to save into their workplace retirement plan as well.
- Need Immediate Tax Deductions: Traditional IRA, SEP IRA, or SIMPLE IRAs can help reduce your taxable income now.
Don’t Wait to Secure Your Future
Retirement planning may seem daunting, but as a small business owner, you owe it to yourself and your employees to start now. With various small business IRAs tailored to meet a variety of needs, there’s no reason to delay. The sooner you start, the more time your money has to grow—and the more secure your future can be.
If you’re ready to take the next step, consider speaking with a financial advisor like myself to ensure you’re making the best choice for your situation. Your future self will thank you!
Nichole Coyle, CFP®, CSLP®
Managing Partner, Financial Planner
2300 St. Clair Ave NE
Cleveland, OH 44114
216.621.4644 x1607 office
330.607.2213 cell
nichole@impactcfp.com
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This information is not intended as tax or legal advice.
Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.
To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
Posted In: Guest Blog, Tips For Managing Finances
