Think Beyond Retirement
For a small business owner, choosing a retirement plan isn’t just about saving for someday. It can also be an important part of your business and tax-planning strategy today.
Depending on your business structure, income, employees, and goals, options such as a SIMPLE IRA, SEP IRA, or solo 401(k) may allow you to build retirement savings while potentially reducing taxable income.
But the plan with the biggest contribution limit isn’t automatically the best plan for your business.
Before choosing one, start with three questions.
1. Do You Have Employees?
This is one of the most important questions.
A solo 401(k) is generally designed for a business owner with no employees other than a spouse. That can make it an attractive option for a sole proprietor or other owner-only business.
A SIMPLE IRA is designed for small employers and allows eligible employees to make contributions while requiring the employer to make contributions under the plan.
A SEP IRA can also be used by businesses with employees, but employer contribution requirements for eligible employees need to be considered carefully.
Adding employees—or planning to hire soon—can significantly change which retirement plan makes the most sense.
2. How Much Do You Want to Contribute?
Your income and cash flow matter.
Some business owners want to maximize retirement savings every year. Others need greater flexibility because business income fluctuates.
Different plans have different contribution limits, employer contribution requirements, administrative responsibilities, and opportunities for additional contributions based on age.
Instead of asking, “Which plan lets me contribute the most?” consider asking:
“How much can my business comfortably contribute while still maintaining healthy cash flow?”
A retirement contribution can provide valuable tax advantages, but it shouldn’t leave your business without the cash it needs to operate.
3. What Are Your Tax and Business Goals?
Retirement planning and tax planning often overlap.
Depending on the plan and type of contribution, contributions may reduce taxable income while allowing retirement investments to grow tax-deferred. Certain plans may also offer Roth contribution options.
But taxes shouldn’t be the only consideration.
Think about:
- Your current taxable income
- Expected future income
- Business cash flow
- Whether you have employees
- Your age and retirement timeline
- How much flexibility you want
- Administrative responsibilities
- Whether you expect the business to grow or hire
The right retirement plan should fit both your personal retirement goals and the financial realities of your business.
SIMPLE IRA, SEP IRA or Solo 401(k)?
There isn’t one answer that’s right for every entrepreneur.
A SIMPLE IRA may appeal to a small employer looking for a relatively straightforward employee retirement benefit.
A SEP IRA may offer flexibility for an owner who wants to make employer contributions without operating a traditional 401(k).
A solo 401(k) can offer significant planning opportunities for an owner-only business or an owner and spouse.
The important part is understanding the tax, payroll, employee, contribution, and administrative consequences before selecting a plan.
Make Retirement Planning Part of Your Business Planning
If you’re having a successful year, don’t wait until you’re preparing your tax return to start thinking about retirement.
Fall is an especially good time to look at your projected business income, estimated tax liability, cash flow, and retirement savings together.
At Gleason Tax Advisory, we help small business owners look beyond the tax return and consider how today’s business decisions may affect their bigger financial picture.
Before choosing or changing a retirement plan, let’s talk about your business, your taxes, and what you’re trying to accomplish.
Happier, Healthier & Less Stressed.