Solo, SEP, or SIMPLE? Retirement Planning For Entrepreneurs & Business Owners

If you're self-employed and run your own business, you understand it can be challenging. Retirement is no different. Luckily there are some retirement plan options specifically designed for business owners. Just as in business, having the right plan in retirement is also pivotal for success. Let's take a deeper look to compare the pros, cons and features of a few popular options you may want to consider.

Solo 401(k)

If you are self-employed and have no employees on your payroll, a Solo 401(k) may be something to consider. You can employ your spouse and still qualify, but no one else. Employing your spouse comes with some perks as well. We'll discuss that in a minute. Business owners who have employers are not eligible to contribute to a Solo 401(k). Keep that in mind if you have plans to hire employees in the future. Your spouse is the only person you can employee and still be eligible for this plan.

Contributions to and withdrawals from a Solo 401(k) works like a standard 401(k) if you were employed by a company. Your contributions are tax-deferred and you are not able to withdraw money (without penalty) until age 59 1/2.

Contribution limits is where the big difference and advantage come in to play. In 2024, you are able to contribute up to $69,000. You may also qualify to contribute an additional $7,500 with a 'catch-up contribution'. The reason you able to contribute a larger amount is because you can contribute as 'the employer' and 'the employee'.

As 'the employee' you can contribute up to $23,000 just as a regular employee would if they worked for an employer in 2024. This is where you could also take advantage of the $7,500 catch up if eligible. As 'the employer' you can make additional contributions up to the $69,000 threshold.

If you recall, I mentioned employing your spouse can have its perks. As long as your spouse has enough earned income from the business, they can also contribute up to $23,000 as an employee in 2024. As 'the employer' you can make the same % of contribution for your spouse as you did for yourself. This can effectively double your household contributions.

Be aware there is also a ROTH option available with some Solo 401(k) plans. Just like with all ROTH accounts, the contributions are not tax-deferred, but growth and withdrawals are tax-free.

SEP IRA

A Simplified Employee Pension (SEP) IRA is another retirement plan often utilized by self-employed individuals and small business owners with a few or no employees on their payroll.

The contribution limit for 2024 is the lesser of $69,000 or 25% of your net self-employment earnings/compensation. The compensation limit is $345,000 in 2024. Until recently, you could only make traditional tax-deferred contributions to a SEP IRA. There is now an option for you to make Roth contributions as well. Withdrawals made on tax-deferred contributions will be taxed as regular income in retirement. Withdrawals made on Roth contributions will be tax-free.

Be aware that if you have employees, you have to contribute the same % amount as you contributed for yourself. Let's say you make $250,000 and contribute 25% which is $50,000 to your SEP IRA. Now let's say you have 3 employees all making $100,000. You will need to contribute 25% of their earnings as well. That is $25,000 per employee in contributions you will be required to make. Since this can become costly, a SEP IRA is often used by self-employed or small businesses with very few employees.

SIMPLE IRA

Have more than a few employees or planning to hire more? If you own a small business with 100 or fewer employees, a SIMPLE IRA may be an option to consider.

In 2024, you can contribute up to $16,000 to a SIMPLE IRA and a catch-up contribution of $3,500 is available if eligible. If you also contribute to an employer plan the limit is $23,000. Your contributions are tax-deferred and withdrawals are taxed as regular income in retirement. Employees are able to make contributions as well by deferring a portion of their salary. As the employer, you are typically required to match the employee's contributions up to a certain %. Any contributions you match/make on their behalf can be written off as a business expense as well.

While most SIMPLE IRAs use traditional, tax-deferred contributions, you are also able to make Roth contributions just like with the Solo and SEP options we discussed previously. Another thing to note, there are now options available for SIMPLE 401(k) plans as well. These operate very similar to the SIMPLE IRA, but often require more administrative oversight.

How To Get Started

Most online brokerages will allow you open a Solo, SEP or SIMPLE plan fairly easily. Each plan has their own nuances for signing up, but the process for each is fairly straightforward. Before setting up a plan, you may want to consult your advisor or CPA to ensure you picking the best plan to fit your current (and future) needs.

Disclaimer: Contents of this post are not to be construed as tax, legal, insurance or financial advice. This post is for entertainment purposes only and members of Hillcreek Solutions are not to be held liable for any use or misuse of this content. Everyone's situation is unique and if you need advisory services, please contact a licensed professional in the respected field you are seeking advice.