The 3 Best Small Business Retirement Plans: SEP IRAs, 401(k)s, and SIMPLE IRAs
So, you're ready to invest in your future and that of your employees—which means choosing the right small business retirement plan. And you're well aware that adding a good plan to your benefits package not only helps attract and retain talent but also provides significant tax advantages.
But with so many options, where do you start?
Don’t worry, we’ve put together a quick intro guide exploring three of the best retirement plans for small businesses: SEP IRAs, 401(k)s, and SIMPLE IRAs! Check out our simple breakdown of each plan's offerings, how they work, their pros and cons, and essential setup guidelines and deadlines.
SEP IRAs
Employers and self-employed individuals can establish a Simplified Employee Pension (SEP) IRA. This small business retirement plan can be a great fit for solopreneurs or employers with only a few employees. It allows for tax-deferred retirement savings with relatively high contribution limits.
How It Works
Who is eligible? You must set up SEP IRAs for all eligible employees, typically those who are at least 21 years old, have worked for your business in at least three of the last five years, and have received at least $750 in compensation during the year.
What are the contribution rules and limits? Only employers can contribute to SEP IRAs, and contributions are discretionary, meaning the employer can decide how much to contribute each year. The contribution limit for 2024 is the lesser of 25% of an employee's compensation or $69,000.
What are the tax implications? Contributions are tax-deductible for the employer and grow tax-deferred until withdrawal.
Pros and Cons
A SEP IRA is a popular type of small business retirement account because it offers:
High contribution limits, which allow for significant retirement savings.
Simple administration and low cost to maintain.
Tax-deductible contributions, which reduce taxable income and vest immediately.
Flexibility regarding annual contributions—you can set your contribution amounts and don’t have to contribute every year.
However, keep in mind that:
Only employers can contribute, which might not appeal to employees who want to save independently.
Contributions must be equal for all eligible employees, which can be costly if you have many employees.
There are no catch-up contributions for those 50 and older.
Establishing & Funding SEP IRAs
You can set up a SEP IRA through most financial institutions, and the process is generally easy. The contribution deadline is the employer’s tax filing deadline for the prior year’s taxes (typically April 15th), including extensions.
401(k) Plans
A 401(k) plan is a popular and versatile retirement savings option that allows both employers and employees to contribute. It offers a variety of features and benefits, including high contribution limits and potential employer matching. So, if you want to attract and retain employees with a competitive benefits package and want to offer significant retirement savings potential, a 401(k) could be the plan for you.
How It Works
Who is eligible? Employers can set their eligibility requirements for this common small business retirement plan, often including age and length of service.
What are the contribution limits? Employees can contribute up to $23,000 in 2024 (including catch-up contributions of $7,500 for those 50 and older). Employers can also make contributions through matching or profit-sharing.
What are the tax implications? Employee contributions are typically made pre-tax, reducing taxable income, and grow tax-deferred. Roth 401(k) options are also available, allowing for after-tax contributions with tax-free withdrawals in retirement.
Pros and Cons
401(k)s are one of the best small business retirement plans because they allow:
High contribution limits and the ability to offer employer matching.
Employee and employer contributions, which provide a robust retirement savings potential.
Plan customization to meet specific business needs.
But 401(k)s aren’t always the best fit for self-employed people or those with very small teams because they:
Are more complex and costly to administer compared to SEP IRAs and SIMPLE IRAs.
Require annual filing of Form 5500 with the IRS.
Are subject to nondiscrimination testing to ensure benefits do not favor highly compensated employees.
Establishing & Funding 401(k)s
401(k) plans must be established by the end of the employer's tax year. Because it can take eight to twelve weeks to set up the plan and enroll employees, we recommend starting this process by September 1st so you can have it live by December 31st. Contributions must be made by the tax filing deadline (again, typically April 15th), including extensions.
SIMPLE IRAs
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is designed for small businesses with 100 or fewer employees. It offers a straightforward, cost-effective way to provide retirement benefits with mandatory employer contributions.
How It Works
Who is eligible? Employers must set up SIMPLE IRAs for all employees who earned at least $5,000 in compensation in any two previous years and are expected to earn at least $5,000 in the current year.
What are the contribution limits? Employees can contribute up to $16,000 in 2024, with catch-up contributions of $3,500 for those 50 and older. Employers must either match employee contributions up to 3% of their compensation or make a 2% non-elective contribution for all eligible employees.
What are the tax implications? Contributions are tax-deductible for the employer and grow tax-deferred until withdrawal.
Pros and Cons
A SIMPLE IRA is, as its name implies, simple—which is what makes it one of the best small business retirement plans. This type of account offers:
Lower contribution and cat limits compared to 401(k)s, but still substantial.
Easy, inexpensive setup and administration.
Mandatory employer contributions help ensure employees save for retirement.
On the other hand, sole proprietors and small business owners should be aware that SIMPLE IRAs:
Limit retirement savings because of their lower contribution and catch-up contribution limits.
Provide less flexibility in employer contributions compared to SEP IRAs.
Can be a financial burden due to the mandatory employer contributions.
Establishing & Funding SIMPLE IRAs
You can establish a SIMPLE IRA between January 1 and October 1 of the calendar year. If you established your new business after October 1, you can still set up a SIMPLE IRA but must do so as soon as possible after forming your business. Contributions must be made by the tax filing deadline, including extensions.
What’s the Best Small Business Retirement Plan for You?
To find the right small business retirement plan, you'll need to weigh the pros and cons of each option and consider your business's unique needs and circumstances. Remember that SEP IRAs offer simplicity and high contribution limits, 401(k)s provide flexibility and high savings potential, and SIMPLE IRAs offer a straightforward and cost-effective solution with mandatory contributions.
By understanding the features and requirements of each plan, you can make an informed decision that will help you and your employees secure a financially stable future.
Do you have questions about your business finances or need a recommendation for a reliable retirement plan administrator? We’re happy to help! Book an intro call today.