We recently discussed that two of the more popular options when it comes to saving for retirement are your Traditional 401K’s and your Traditional IRA’s. But what do you do if you are a small business owner or a one-man shop? You can still save to a Traditional IRA or Traditional 401K but you’ve got other options as well (you can still do a Roth IRA too). But there are other things that are available to you: there is a Solo 401K that is only for one-man shops (you can’t have any employees with that), there is a SEP IRA, and there’s also a SIMPLE IRA. There’s lots of options out there! Part of the decision that comes with those is how much do you want to contribute, how much do you want to take care of and offer as a benefit to your employees, and what are you willing to pay for in administrative costs?
With a Solo 401K, like I mentioned that is only for one-man shops (hence the name, Solo), you cannot have any employees to set one of these up. With a Solo 401K, you can contribute up to $58,000 a year in 2021 through a combination of employee contributions and then a profit-sharing plan where the employer (the business) can contribute up to 25% of your revenue. That is one option.
For a SEP IRA, that is just employer contributions, and you can also contribute up to $58,000 for 2021 (up to either the lesser of $58,000 or 25% of eligible employee’s compensation). A caveat with this one is, like I mentioned, eligible employees, so there are eligibility requirements based on your employees. If you say “you know what, 25% of my salary sounds good! I’ll be able to sock away a lot that way”, it’s 25% for each eligible employee. So whatever percentage you choose, it is the same percentage for everybody who qualifies. If you do 25% for yourself and you have three other employees that qualify, you have to do 25% of their salary as well. That’s where you have to weigh how much do I want to take care of them (your employees) versus how much do I want to put away myself.
Then, when we look at Simple IRA’s, it operates a little bit like a Traditional IRA. The employees are able to put away up to $13,500 for 2021, just like a Traditional IRA. Then, the employer has to choose to either match dollar-for-dollar up to 3% of each eligible employee, or do a flat 2% contribution to each employee. So, the employer has to do something, either the flat contribution or a dollar-for-dollar match. Either way, you’re going to contribute to your employees.
This is where what you are wanting to do really comes down to: 1) how much you want to put away, 2) how much you are wanting to take care of and offer as benefit to your employees, and 3) what you’re willing to pay for in administrative costs. 401K’s are going to be a little bit more expensive because there is more administrative work that goes on with setting those up and maintaining them. Your IRA’s are going to be easier to set up and a little bit less expensive when it comes to the maintenance and the administrative costs. There are other features that we didn’t get into, so if you want to talk about what’s right for you if you’re looking to set something up for yourself or for your company, as always you can reach out to us here at Next Step. We will walk you through all the options, help you figure out which plan is right for you based on what you are trying to do, and then if you need help setting it up, we can do that for you as well. We’d love to walk with you through whatever step of your financial journey you are on!