As a small business owner, you need to be thinking about some kind of retirement savings for yourself and your employees. In this competitive employment environment, having a retirement plan for your current or future employees might help attract and retain better help. Some important considerations in choosing the best retirement plan for your situation include:

  •   Do you currently have or anticipate having employees in the future?
  •   Is it a priority that employees contribute to the retirement plan?
  •   Is your priority higher contributions or ease of administration?

Below are some alternatives to consider.

  • Roth IRA.  Even with no employees, a business owner can set up an individual Roth IRA.  The primary eligibility requirement is that the participant has “earned income.”  Earned income is earned by working for someone else who pays you or income earned by running your own business or farm.  Any type of passive investment income resulting from securities, rental property, or other assets is categorized as unearned income and cannot be contributed to a Roth IRA.  Contribution limits for 2023 are $6,500 for individuals under age 50 and $7,500 for individuals over 50.

  • Payroll Deduction IRA.  If you are an employer but do not want to adopt a retirement plan, you can allow employees to contribute to their IRA through payroll deductions.  The employee decides how much and when to contribute to the IRA.  No employer contributions are required.

  • Simplified Employee Pensions (SEPs).  Employers can set up a SEP IRA for themselves and each employee.  The employer must contribute a uniform percentage of pay for each employee, and the owner is considered an “employee.”  Employer contributions are limited to the lesser of 25% of pay or $66,000 in 2023.  This plan is beneficial to cover the owner(s) of businesses with no employees.  Advantages include the fact that employers are not required to make contributions every year and start-up and operating costs are low.

  • Simple IRAs.  Available for employers with 100 or fewer employees.  Requires an Employer/ Employee match.  Employees can contribute up to $15,000/year in 2023 via payroll deduction.  Employers must either match the employee contributions dollar for dollar, up to 3% of an employee’s compensation, or make a fixed contribution of 2% of compensation for all eligible employees, even if the employee chooses not to contribute.  Easy to set up and maintain.  Employees can decide how and where the money will be invested and retain the Simple IRA even when they change jobs.

  • 401(k) Plans.  Solo plans are possible.  The 2023 contribution limit is $22,500. The employer is not required to match.  The employee actually defers a portion of their salary.  These deferrals go into the 401(k) plan sponsored by the employer and are accounted for separately for each employee.  Employees can choose to contribute either on a before-tax or after-tax (Roth) basis.  Plans may or may not require employer contributions.  The employer contribution may be a profit-sharing contribution.  There is a special rule for sole proprietors and single-member LLCs.  They can contribute 25% of net self-employment income, which is net profit less half your self-employment tax and the plan contributions you made for yourself.  The limit on compensation that can be used to factor in your contribution is $330,000 in 2023.

Although these alternatives are relatively “simple,” there are additional alternatives and regulations involved.  Consult your tax professional for additional information. And as always, you can discuss the strategy and goals for each of these solutions with your Wyoming SBDC Network business advisor. Make an appointment today and start saving for your future. 

About the Author: Cindy has been helping Wyoming entrepreneurs start or improve their businesses for the past 17 years. An entrepreneur herself, she thrives on the challenge of understanding each new business and business owner and helping them to succeed. Currently the owner of several rental properties, she has owned a number of other small businesses, including a want ad newspaper, a secretarial service, and a stained glass studio.

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