Own a business? Consider these retirement plans

Long version

If you own a small business or are self-employed, you’ve always got plenty to do, but you can’t forget about the days when you’ll be less busy — that is, when you’re retired. How can you prepare for that time of your life?

One key step is establishing a retirement plan for your business or yourself. And thanks to the 2022 SECURE 2.0 Act, you can now receive tax credits for opening and administering a 401(k), SEP-IRA or SIMPLE IRA. These aren’t the only plans available for small businesses or sole proprietors, but they are among the most popular. Let’s look at each of them:

401(k) – A 401(k) offers several key benefits: First, any earnings growth is tax deferred, and your contributions can be tax deductible. (Taxes are due upon withdrawal, and withdrawals prior to age 59½ may be subject to a 10% penalty.)

If you choose a Roth 401(k), your contributions aren’t deductible, but your earnings and withdrawals will be tax free, provided you meet certain conditions. And a 401(k) offers a variety of investment options. If you have workers, you’ll need to consider whether to offer matching contributions, which are tax deductible to you, up to the limit of 25% of compensation paid to eligible employees.

But even if you’re self-employed, with no employees other than your spouse, you can establish what’s known as a “solo” or “owner-only” 401(k). In 2023, you can put in up to $22,500 as an employee, plus a catch-up contribution of $7,500 if you’re 50 or older, for a total of $30,000. Plus, you can contribute an additional 25% of earned income as an employer, up to an overall employee and employer maximum of $66,000 (or $73,500 if you’re 50 or older).

SEP-IRA – An SEP-IRA may be attractive to you if you’re self-employed or if you own a business but have few or no employees. That’s because you must contribute an equal percentage of your own compensation to every eligible employee. In 2023, you can contribute up to $66,000 or 25% of your income, whichever is less.
SIMPLE IRA – A SIMPLE IRA is easy to establish and administer. As with an SEP-IRA, earnings in a SIMPLE IRA can grow on a tax-deferred basis. If you have employees, they aren’t required to contribute to this plan — but you are. You must match up to 3% of employees’ contributions or provide 2% of their annual salaries, although you do have some flexibility. If your business goes through a rough patch, you can temporarily decrease SIMPLE IRA contributions to 1% for up to two years out of the previous five. Your contributions to your employees’ accounts are tax deductible, but in in terms of building resources for your own retirement, a SIMPLE IRA may be less appealing because of its contribution limits, which are relatively low compared to a 401(k) or SEP IRA. In 2023, you can put in up to $15,500, or $19,000 if you’re 50 or older.

You should consult with your tax advisor to determine which retirement plan is right for you. Your financial advisor can also help you explore your options. And the sooner you put a plan to work, the better.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Edward Jones, Member SIPC

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Short/radio version

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PSA: Own a business? Consider these retirement plans

TBA: Sept. 11, 2023

Do you own a small business or are you self-employed? If so, have you considered sponsoring a retirement plan?

Now is a good time to start one. Thanks to the SECURE 2.0 legislation, you can receive tax credits for opening and administering a 401(k), SEP-IRA or SIMPLE IRA. And all these plans offer tax benefits and access to many investments.

A 401(k) might be a more efficient plan for businesses with several employees. But even if it’s just you, and possibly your spouse, you could open what’s known as a Solo 401(k). And a 401(k) has high contribution limits, so you can put away substantial amounts for your retirement.

A SEP-IRA also has high contribution limits, but it might be more suitable if you’re self-employed or have few or no employees. That’s because you must contribute the same percentage as your own compensation to every eligible employee.

Finally, a SIMPLE IRA is easy to set up and administer. However, the contribution limits are much lower than those of a 401(k) or SEP-IRA.

Check with your tax advisor to determine which plan is right for your needs – and the sooner you get started, the better.

This content was provided by Edward Jones for use by (FA’s NAME), your Edward Jones financial advisor at (Branch address or phone #).

Member SIPC

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