facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause

Small Business Owner Retirement Decision Tree

Financial Planning Retirement Funding

Some of the most frequently asked questions we receive from self-employed individuals revolve around the different retirement plans available to them and their employees. SEP IRAs, SIMPLE IRAs, and Solo 401(k)s, in addition to other plans, each have distinct characteristics with regards to administrative requirements, contribution amounts, employee eligibility, and ROTH and loan provisions, among others. The Financial Planning Team has created a Decision Tree to assist in these considerations. Your Financial Planner is readily available to provide any further clarification or discuss in greater depth, as well as potentially assist in implementing a retirement plan for your small business based on stated goals and objectives.

SEP IRA

  • Easy to set up/limited paperwork, may be established and funded up until federal tax filing deadline •
  • No annual reporting
  • Contributions do not need to be made every year
  • Employers must make same % of salary contribution to all employees including themselves (up to 25% of employee contribution, 20% of net self-employment earnings)
    • Qualified employees for participation (may be less stringent): age 21 or older, performed services for three of the past 5 years, received at least $650 in compensation during the year

SIMPLE IRA

  • Easy to set up/limited paperwork, must be established with an effective date between Jan. 1 – Oct. 1 though employer may fund up until federal tax filing deadline
  • No annual reporting •Employees may contribute up to $14,000 for 2022 (additional $3,000 if over age 50)
  • Employers must make same % of salary contribution to all employees including themselves (either 2% fixed or 3% match), •25% penalty on employee distributions/rollovers within first two years
    • Qualified employees for participation: earned at least $5,000 in compensation in prior two years and reasonably expected to do so again this year

Solo 401(k)

  • Potential for higher contribution amounts than SEP or SIMPLE
  • Combination of employer and employee contributions accommodates businesses with more variable income still looking to maximize deductible contribution each year
  • Annual filing required (Form 5500 EZ) once plan assets exceed $250,000
  • Employee contribution limit ($20,500 for 2022) applies across all plans vs. per plan

Defined Benefit Plan

  • Contribution limit determined actuarily each year based on desired benefit ($245k max annual benefit), age, and expected investment returns
  • Downside is setup and ongoing administrative cost (trickier if/when employees involved)
    • Annual filing of Form 5500
  • Annual funding required to fund future benefits

401(k)

  • Some additional administrative work and expense (rules and testing to avoid discrimination unless Safe Harbor election is made)
  • Allows for ROTH salary deferrals and more flexible withdrawal options
  • May be utilized in conjunction with profit-sharing plan (employer-only contributions)
    • Qualified employees for participation (may be less stringent): age 21 or older, at least one year of service

Tax Cuts & Jobs Act (TCJA) & Qualified Business Income (QBI) Deduction – Contributions to SEP/SIMPLE IRA/Solo 401(k) reduce QBI deduction, but deductible Traditional IRA contributions do not impact calculation for QBI. Hence, deductible (if eligible) Traditional IRA contributions, along with additional after-tax savings, could potentially prove more beneficial than SEP/SIMPLE IRA/Solo 401(k) contributions

IMPORTANT DISCLOSURE INFORMATION

For general informational purposes only. Subject to change without notice. There can be no assurance that any of the above content will be applicable for your individual situation, or that any financial planning or consulting services provided by provided by Steigerwald, Gordon & Koch, Inc. (“SGK”) will prove successful. SGK is neither a law firm, nor a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from SGK. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.sgkwealthadvisors.com. The scope of the services to be provided depends upon the needs and requests of the client, and the terms of the engagement. Please Remember: If you are a SGK client, please contact SGK, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently.