Retirement Plans for Entrepreneurs


As you may know, the world of entrepreneurship comes with a variety of pluses and minuses. Many people strive to build their own businesses in order to set up a passive income stream and flexible work life arrangement that allows them to balance time with family alongside time following passions. The potential downside to venturing down your own path is needing to learn how to adequately handle the lack of stability or ongoing recurring revenue that a typical employee / employer relationship would set you up with. Having a variable income makes it harder to budget (but it can be done) and also means you have to be even more proactive in setting aside money for retirement, because there isn’t an employer looking over your shoulder who will set it up for you.

When it comes to saving for your future self, where do you start and which is the best option on for you? Read on for an overview of three retirement accounts that are great options for entrepreneurs.

The Solo 401(k):

What it is: A Solo 401(k) is a traditional 401(k) that covers a business owner with no employees or that person and his or her spouse.

Pros: With a Solo 401(k), you can shelter more at a lower income level than with a SEP IRA. In addition, if needed (although not recommended), you have the option to borrow from your balance (up to a limit). There’s also the ability to take advantage of the Roth option through employee deferrals.

Cons: If you’re working a day job while starting your business on the side – this account may not be your best bet if you’re already stocking away into a 401(k) plan. Once you have over $250,000 in the plan, you’ll need to file an annual Form 5500, so beware that there is some paperwork involved. Be sure to check on the fees involved with set up at your custodian.

Max 2014 Contribution: With a Solo 401(k), a business owner can make elective deferrals up to 100% of earned income up to an annual maximum contribution of $17,500 in 2014 and employer non-elective contributions of 25% of compensation, with total contributions not to exceed $52,000 for 2014.

Contribution Deadline:  Your 401(k) must be set up by December 31st and funded by your tax return due date in order for contributions to apply for that year.

Simplified Employee Pension (SEP) IRA: What it is: A SEP IRA is a retirement account that allows for a contribution up to 25% of each employee’s pay (and 25% of your net self-employment income).

Pros: These accounts allow for a lot of flexibility as there is no requirement that you need to contribute each year, which allows you to evaluate on an annual basis as to whether or not the funds are available and how much you can reduce your taxes by.

Cons: If you’re in a business that is growing and taking on employees, this plan can get expensive as it must include all eligible employees over the age of 21, who have worked for the employer in 3 of the last 5 years and received at least $550 in compensation throughout the year. Also, there’s no Roth option for a SEP IRA.

Max 2014 Contribution: Annual contributions are limited to the smaller of $52,000 or 25% of compensation. Contribution Deadline: New plans can be set up and contributions made by the due date for filing your federal income taxes for the year.

Savings Incentive Match Plan for Employees (SIMPLE) IRA:

What it is: A SIMPLE IRA is a retirement plan designed for and available to any small business with 100 or fewer employees.

Employer is required to contribute each year either a matching contribution of 3% of compensation or 2% nonelective contribution for each eligible employee (meaning the employer contributes even if the employee doesn’t).

Pros: Easy to set up

Cons: If withdrawals are made from the plan within the first 2 years, the 10% penalty is increased to 25%.

Max 2014 Contribution: An employee can contribute $12,000 in 2014.

Contribution Deadline: Plans must be set up by October 1st of the year in which created and all employee contributions must be made by December 31st.

No matter which account you choose, get started with saving for your future today. Start small and automate – you’ll be on your way in no time!

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Mary Beth Storjohann, CFP® is an author, speaker, and financial coach who takes a fun, no-nonsense approach in working with individuals and couples across the country, helping them make smart choices with their money.

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