Retirement plans for business owners

As a business owner or self employed individual, there are options available for funding your retirement in addition to those options which are available for anyone with earned income, such as traditional and ROTH IRA accounts.  The most common types of retirement accounts for business owners are SEP-IRAs and 401K plans, which will be reviewed in detail in this article.  For information on additional options available, please see this article on defined benefit pension plans for small business owners.

SEP-IRA retirement plans

A SEP-IRA account is the same as a traditional IRA in most ways.  The only substantial difference is that with a SEP-IRA, the participant can contribute up to 25% of compensation, or $54,000 for 2017 ($60,000 for persons ages 50 or older), whichever is lesser.  This could end up being substantially more than the contribution limit for a traditional IRA account, depending on the compensation of the participant.  In order to be eligible to establish a SEP-IRA, you must own a business (this includes being self employed).  If you have any employees, they are eligible to have a SEP account as well, and must be included if they meet certain criteria (worked for the business for 3 of the previous 5 years, attained age 21, and had at least $600 in compensation.  These requirements can be made less restrictive in the SEP-IRA plan document).  SEP-IRAs have the main advantage of being easy and relatively inexpensive to administer.

401K retirement plans

A business owner, including a self employed person, has the option of establishing a 401K plan for his or her self and employees.  The participant can contribute 100% of compensation, up to the limit ($18,000 for 2017 plus a $6,000 “catch-up” contribution if age 50 or older).  The business owner can also make a non-elective contribution of up to 25% of compensation.  The rules related to the non-elective contribution are a bit more complex for a self employed individual but are in the same general range.  401K plans are in general a bit more time consuming and costly to administer than SEP-IRA plans, however they have the main advantage of having larger contribution limits than SEP-IRAs.  They also allow the participant to take loans against their 401K balance, something which is prohibited by the IRS rules pertaining to IRAs, including SEP-IRAs.