Retirement Plan Options for Business Owners

I’ve had several business owners ask me about the various retirement plans that are available, and how they might impact their taxes.  In response, I’ve created this (very basic) listing of the Retirement Plan Options available to Business Owners.  For more information, please don’t hesitate to call our office 716.320.1829.

 

TRADITIONAL IRA:

$6,000 annual contribution limit (per person)

$7,000 (age 50+)

Pros:

  • Pretax contributions, tax-deferred until distributions in retirement
  • Funds grow tax-deferred

Cons:

  • The tax rate might be higher in subsequent (retirement) years
  • Difficult to access the money until age 59 ½ (exceptions apply)
  • Contribution limits are cumulative total for BOTH Traditional and ROTH accounts

Interaction w/ Business:

  • Contributions are NOT deductible to the business but lower your taxable income on your personal tax return (1040)

 

 

ROTH IRA:

$6,000 annual contribution limit (per person)

$7,000 (age 50+)

Pros:

  • After-tax contributions, tax-deferred until distributions in retirement
  • Taxes already paid, so the entire balance of funds available for distribution

Cons:

  • Contributions do NOT lower taxable income
  • Contribution limits are cumulative total for BOTH Traditional and ROTH accounts

Interaction w/ Business:

  • Contributions are NOT deductible to the business and do not lower your taxable income on your personal tax return (1040)

 

 

SIMPLIFIED EMPLOYEE PENSION (SEP) IRA:

For self-employed people and small business owners with few / no employees

2021 Contribution Limits cannot exceed the lesser of:

  • 25% Compensation (self-employment income)
  • $58,000

Pros:

  • Pretax contributions, tax-deferred until distributions in retirement
  • Funds grow tax-deferred

Cons:

  • No ROTH conversion option
  • Require proportional contributions for each eligible employee if you contribute for yourself
  • Difficult to access the money until age 59 ½ (exceptions apply)
  • Contribution amounts reduce the amounts you can contribute to other IRAs, including ROTH.

Interaction w/ Business:

  • Contributions are deductible to the business, including contributions made to employee accounts
  • Flexibility – you don’t have to commit to contributing every year

 

 

SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES (SIMPLE) IRA:

Small company version of a 401(k) plan.

Allows for employee AND employer contributions

2021 Contribution Limit:

$13,500

$16,500 (age 50+)

Employer contributions are mandatory and can be made using one of two methods:

  • Provide matching contributions up to 3% of the employees pay, not limited by the annual compensation limit
  • Make non-elective contributions equal to 2% of the employee’s compensation based on max. salary of $290,000.

Low eligibility requirements.  Can participate if they’ve received at least $5,000 in compensation during any two preceding calendar years.

Pros:

  • Pretax contributions, tax-deferred until distributions in retirement
  • Funds grow tax-deferred
  • SIMPLE contributions are NOT cumulative with traditional and ROTH IRA limits and will not reduce the amount you can contribute to them. However,   they ARE cumulative with the contribution limits for other employer-sponsored plans, such as 401(k) plans and 403(b) plans.

Cons:

  • Employer contributions mandatory
  • No ROTH conversion option
  • Difficult to access the money until age 59 ½ (exceptions apply)

Interaction w/ Business:

  • Contributions are deductible to the business, including contributions made to employee accounts

 

If you are looking for a certified public accountant in the Buffalo area to assist you with taxes and more, do not hesitate to reach out to our team.