Along with making money with their business, most small business owners also try to minimize income taxes and grow their wealth. Qualified retirement plans present an excellent opportunity to accomplish these last two objectives. The rules for retirement plans can be confusing and you will need to consult qualified tax and investment advisors to implement a plan.  Here are some guidelines to get you started.

Single Employee Businesses

This article focuses on the opportunities for sole proprietors and companies that employ only the owner (and a spouse). Individuals such as real estate brokers, consultants, outside board members, sole professional practitioners and other self-employed individuals can have a great deal of flexibility in choosing a plan that best fits their goals. Businesses that have other employees must cover all of their employees in most cases and should seek guidance for a more detailed explanation of their options.

SEP

The SEP (or SEP-IRA) is probably the easiest plan to have.

The plan can be established and funded any time up to the due date or extended due date of your tax return.

The employer can contribute up to 25% of your W-2 or self-employment income, to a maximum of $69,000 for 2024.

Contributions are deducted from the employer’s current taxable income.

SIMPLE-IRA

These plans are relatively easy to have and are generally more attractive than SEP-IRAs since they allow for both employer contributions and employee salary deferrals.

For 2024, employees can defer up to $16,000 of wages into the plan and employers can match the employee contribution up to 3% of the employee’s wages. Those ages 50 and over can contribute an additional $3,500 for 2024.

The employee’s deferral reduces their taxable wages, and the employer contributions are deducted from their current taxable income.

The One Person (Solo) 401(k) Plan

Large companies have been using 401(k) plans for many years. Recent changes have resulted in these plans now being attractive to single employee businesses. Although Solo 401(k) plans are more complicated than SEP-IRAs and SIMPLE-IRAs, they offer higher contribution limits and more flexibility.

The plan must be established, and year-end and contributions must be made, by the due date or extended due date of your tax return.

For 2024, employees may defer up to $23,000 of their wages into the plan. In addition, the employer can contribute up to 25% of the employee’s income. There is an overall limit of $69,000 for employee and employer contributions. The rules also provide for an additional $7,500 “catch-up” contribution for those ages 50 and above in 2024.

401(k) plans also enable employees to borrow from their plan with certain restrictions and repayment schedules.

Summary

Very small business owners and sole proprietors have several options and flexibility to reduce taxes and accumulate wealth through the use of qualified retirement plans. Consult with a qualified tax and investment advisor on which option is best for you.