As a business owner, planning for retirement can seem overwhelming. With so many options available, how do you know which retirement account is right for you? Today, we’ll compare three popular choices: SIMPLE IRA, SEP IRA and Solo 401(k).
SIMPLE IRA
First, let’s discuss the easiest retirement plan to administer, SIMPLE IRA or Savings Incentive Match Plan for Employees IRA. A SIMPLE IRA is available to employers with 100 employees or less and both the employer and employee can contribute. Employees can contribute up to $16,000 in 2024, plus an additional $3,500 catch-up contribution if they are 50 or older making it a total of $19,500. However, if you have 25 employees or less the SECURE Act 2.0 allows employees to increase the deferral limit up to $17,600 for those under 50. So for those over 50, the catch-up contribution is increased to $3,850 for a total of $21,450 for these employees.
Employers are required to either match employee contributions up to 3% of their salary or make a fixed contribution of 2% of each eligible employee’s salary. While a SIMPLE IRA is easy to administer and low-cost to set up, they have lower contribution limits compared to other plans.
SEP IRA
Next, the SEP IRA, or Simplified Employee Pension IRA. This is a great option for self-employed individuals and small business owners with a few employees and with higher salaries. Contributions are made by the employer only and they can be generous – up to 25% of each employees compensation or $69,000 in 2024, whichever is less. For example, if you have a W2 salary of $276,000, 25% would be $69,000 (the max contribution allowed).
SEP IRAs are easy to set up and have low administrative costs. However, the downside is that if you contribute to your own SEP IRA you must contribute the same percentage to your employee’s accounts.
SOLO 401(k)
Finally, let’s talk about the SOLO 401(k). This is an excellent option for business owners who have no employees other than a spouse. The plan allows for contributions from both the employee and the employer, meaning the business owner can contribute from both sides, as they act as both the employer and the employee.
As an employee you can contribute up to $23,000 in 2024, with a $7,500 if you’re at least 50 years old. That brings the total to $30,500. In addition to the employee contribution, the employer can contribute up to 25% of your compensation. The combined total can be substantial. For 2024, the total contribution limit is $76,500 if you’re eligible for catch-up contributions.
A solo 401(k) comes with some of the highest contribution limits. However, the downside is that it can come with more paperwork such as a yearly tax filing and administration is more time consuming than the other retirement plan options.
Contact FCA Corp Today
At FCA Corp, our personal advice is tailored to the entrepreneurial spirit that drives you. As a business owner, we understand that among other important decisions, choosing the right retirement plan is essential. You’ve earned the peace of mind and freedom that comes with expert advice. Contact FCA Corp today to get started.
