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What to Know for Small Business Retirement Planning

by on September 30, 2018 5:00 AM

By Brittany N. Cox

Registered Investment Advisor at Nestlerode & Loy Investment Advisors

In the past, I have discussed the trend of saving across generations based on age. While millennials have the bad reputation for savings, another segment of the population I’d like to discuss is small business owners. According to CNBC, using survey a from Manta, 34 percent of entrepreneurs are not currently saving for their retirement. They express many reasons for the lack of savings including not having enough income and/or using their savings they had previously to invest in their business. About 20 percent of entrepreneurs plan to sell their business to fund their retirement.

Manta’s CEO, John Swanciger, said, “Often just keeping retirement top of mind and checking in on it regularly, whether that's quarterly or twice a year, can really help to nudge you over the line to, even if you have a fund, to ... make sure you're putting the most into it that you can afford, for your future." 

If you find yourself self-employed or owning a small business with no retirement plan, your next step should be to meet with a financial advisor and develop a plan. A small deposit can add up over time and getting started sooner is key.

So, what options are available to entrepreneurs for retirement planning? There are a few, but before choosing a plan, you should determine what your needs are. You need to decide if you want your employees to be able to contribute as well, what your priorities are for the plan, and how much you would like to contribute. These and many other factors help entrepreneurs choose the right retirement plan for them and their businesses. It is also beneficial to consult with your accountant for their opinion on what is most suitable for your business.

One option available to entrepreneurs and small businesses for retirement planning is a SEP IRA or “Simplified Employee Pension” IRA. This type of IRA is geared toward self-employed persons or small business owners with or without employees. The business contributes to individual retirement savings accounts for employees and the owner. The owner of the business can set eligibility requirements for their employees’ participation in the plan. It is required that the plan allow employees who have worked for the business in any three of the last five years, are 21 years of age or older, and received at least $600 in compensation this year participation in the plan. However, the owner can select a shorter period for an employee to be eligible. The contributions the business makes to the plan must be the same percentage of salary for every participant including the owner. Contributions do not have to be made every year, but if you contribute for one employee you must contribute for all.

If a small business owner wants employees to have the ability to contribute through salary deferrals, another option is the Simple IRA, which is for companies with 100 employees or fewer that do not have any other retirement plan. The Simple IRA allows for salary reducing contributions for both the employer and employee. The owner of the business can set the restrictions on the plan but must include all employees who received at least $5,000 in compensation during any two preceding calendar years and are expected to receive at least $5,000 during the current calendar year. Generally, the company will match employee contributions up to 3 percent or the company can do a 2 percent nonelective contribution on behalf of all employees regardless of their deferral rate.

Also available for entrepreneurs who do not have other employees is the Self-Employed 401(k). Also called a solo 401(k), it is suitable for a business with no employees except for the owner’s spouse which does not plan to have employees in the future. The advantage of the solo 401k over a traditional 401k is limited testing and reporting, which lowers costs. A Self-Employed 401(k) still offers generous contribution limits. The business owner wears the hats of both the employee and employer for the 401(k). The owner can contribute both elective deferrals of up to 100 percent of compensation up to $18,500 (for 2018) and employer nonelective contributions of up to 25 percent of compensation. The total contribution can not exceed $55,000 total. Of course, a traditional 401k plan is an option as well for small businesses with employees.  

Having a retirement plan for your small business has many advantages. It benefits you, the entrepreneur, your employees, and your business. It is a way to start saving for your own future while also helping your employees plan for their future as well. There are tax advantages that could benefit the business and business owner. If you find yourself owning a small business or being self employed with no retirement plan in place, you should consult your financial advisor and accountant to determine if a small business retirement plan is beneficial for you.


Brittany Cox is a Registered Investment Advisor who works for Nestlerode & Loy, Inc., State College. She serves clients in Centre County and all of Pennsylvania as a fiduciary, fee-based advisor. She is a graduate of the Pennsylvania State University with a BA in business with a focus on financial services. Brittany enjoys working with clients for retirement and college planning. Brittany can be reached at [email protected]
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