Small business owners enjoy great freedom. Along with the long hours and hard work, they have the freedom to set their own hours, make decisions for their business, and decide on the best retirement plan for their own retirement and for their employees.
There are six different types of small business retirement plans that most providers will suggest for their clients:
- Traditional 401(k)
- Safe Harbor 401(k)
- Solo 401(k)
- SIMPLE IRA
- SEP IRA
- Traditional IRA
Based on the business goals set, each type of retirement plan works.
This is the most commonly known type of retirement savings plan. This type of retirement plan is best for businesses that employ 8 or more people. However, the administrative costs of having a traditional 401(k) in place make this costly for the business owner, so think wisely before jumping into this type of retirement plan.
Safe Harbor 401(k)
For businesses with a high employee turnover rate or high-earning employees, a safe harbor 401(k) plan may be best suited for their situation. Similar to the traditional 401(k), this type of retirement plan allows for a much higher employee contributions and do not fall under compliance testing. Therefore, the administrative costs are lower and employees can save more for their retirement without being penalized.
For business owners who do not have employees, or may hire employees at a later date, the Solo 401(k) allows for investments in alternative assets such as real estate. With little to no administrative costs, the flexibility to trade in stocks and bonds, and the freedom to invest in alternative assets, the Solo 401(k) is fast becoming a favorite choice for the self-employed.
For business owners who have lower paid employees, the SIMPLE IRA can be the best option. With limits set at $26,000 per year ($13,000 per employee with an employer match), no filing requirements or administrative costs, this type of retirement plan really is simple to implement.
Perfect for the solo business owner who may employ a spouse, the SEP IRA is different from other types of retirement plans because the employer contributes 100% of the investment up to $56,000 or 25% of the total annual compensation for the business. It is easier to set up a SEP IRA when the business owner wants to trade stocks and bonds online. In addition, there are no set amounts on yearly contributions. Depending on the business owner, contributions can range from the max limit to nothing at all.
The simplest of all the retirement plans, a traditional IRA is perfect for the independent contractor who wants to save monthly for retirement. However, with a yearly limit of $6,000, this option bodes well for part-time self-employed business owners can’t contribute more than $6,000 yearly. In addition, the Traditional IRA is the least expensive type of IRA to set up and maintain. With its ease of use, no administrative costs, and ability to move to different providers, the Traditional IRA is often the choice for small business owners who are just starting out.