As a small business owner you have several retirement plan options to consider, each with its own benefits and requirements. The tax savings associated with a S-Corp make it a popular choice among entrepreneurs and the self-employed. A recent study showed that 20 percent of Americans over 50 have no retirement savings at all.
It’s a tough situation to be in.
However, as a S-Corp owner you have more control as to what types of retirement plans are available to you and the amounts that you can contribute. We will go over some retirement plan options with a focus on single-shareholder S Corporations.
Here are some of the most common plans:
- 401(k) Plan:
A 401(k) plan can be set up for all businesses with or without employees. For 2024 you can contribute up to $23,000 pre-tax ($30,500 if you are 50 or older). An S-Corp allows you to fund your 401(k) both as an employee and employer. Your S-Corp business can contribute up to 25% of your wages but the total contribution (employer and employee) cannot exceed $69,000 ($76,500 if you are 50 or older).
Features: Although there are some additional administrative costs compared to other retirement plans the 401(k) does provide a flexible option.
- SEP IRA (Simplified Employee Pension):
The SEP-IRA is another option for you as an S-Corp owner. Unlike a 401(k) you don’t make employee contributions. Instead your business contributes up to 25% of your salary (but not more than $69,000).
Features: Easy to set up and maintain with employer contributions required by the due date (including extensions) of your tax return. A contribution must be made for all eligible employees.
- SIMPLE IRA (Savings Incentive Match Plan for Employees):
A SIMPLE IRA is another option for the S-Corp owner. It is actually a simple retirement plan to establish. You can expect no additional filing requirements and contributions can be made by both the employee and the employer. The employee can fund up to $16,000 for 2024 ($19,500 if 50 or older). Your business can match up to 3% of your contribution as an employee.
Features: Offers a simpler alternative to a 401(k) with lower administrative costs. Employers must either match employee contributions up to 3% or make a 2% non-elective contribution.
- Defined Benefit Plan:
A defined benefit plan is great for the S-Corp owner who want to make large, predictable contributions. Unlike some other options, a defined benefit plan can be established alongside other retirement plans.
Features: A traditional pension plan where the benefit amount is predetermined. Contributions can be significantly higher compared to other plans, depending on the desired retirement benefit. The use of an actuary can result in higher costs to establish. There are also annual filing requirements.
Each of these plans has different administrative requirements, contribution limits, and tax implications. Limits change from year to year. On top of that if you add employees the type of retirement plan you want to offer may change. It’s a good idea to consult with a tax advisor or retirement plan specialist to determine which option best fits your business’s needs and goals.