Mark J. Kohler breaks down four retirement plans for small-business owners: IRAs for modest savings, SEP/SIMPLE for sole proprietors contributing up to 25% of net income, solo 401(k)s to reduce self-employment tax, and defined-benefit plans for high earners deferring large amounts. The right choice depends on your business structure and profit level.
Chapters
Hi, Mark Kohler here with another two minute tax and legal tip and I'm excited to talk to you about retirement plans in your business. Now this is a huge topic and I'm just going to scratch the surface, but I'm excited about this because a lot of business owners don't realize that they have options other than just the ira. There's a lot of cool strategies and tools you can use in your business to sock away big money and limit how much you may put in the plan for your employees. So as business owners you want to be informed. The first issue to consider is how you're organized as a business. You want to know that your options are going to vary and the ability to put away better money in a tax preferred way is going to be based on how you're structured as a business. A sole proprietorship or an LLC taxed as a sole proprietorship or if you're an S corporation with that salary dividend split strategy. Watch one of my other videos on that topic. So make sure that you're considering how you're structured and how much profit you're making as you analyze which structure for your retirement plan is best for you. Now honestly, your first option, even though I poo pooed it earlier, is that of an ira, an individual retirement account. Now if you're only going to put away four or five thousand dollars during the year, then go with the ira. The IRA is a great place to get started building a little bit of a retirement account and you can always roll it into a more aggressive strategy, whether it's a simple or a 401k later. But start saving something even if it's a few hundred bucks a month and begin with the ira. Now as a business owner you've got two or three other options, much better than an IRA to put money away in a tax preferred manner. Now the first options are your SEP or simple. Now that's going to help you in a sole proprietorship type structure to put away somewhere between 5 to $20,000 or more. Now you're going to generally put away 25% of your net income into these SEP or simple accounts which like a supercharged IRA. Now they're not great because you can only put away a percentage of your net income and you're going to pay a lot in self employment tax to get there. But if you're only making 20 to 30 or $40,000 in your business and you haven't yet become an S corporation, look at the simpler step and it could be a great next step. In your retirement building process. Now the third option which I love is the Solo 401k or 401k with safe harbor provisions. If you have other employees. What's cool about the 401k is you can really start socking away a lot more money with the S Corporation strategy. So you're paying less in FICA or self employment tax, but you're allowed to put away a lot more than a SEPA simple in a tax efficient manner. So you get this head start on a SEPA simple and you keep your salary lower so you're paying less fica. Well as you start to crunch the numbers it gets powerful. So I love the 401k for this this method and you can get 401ks a lot more affordably established nowadays for the small business owner. So look at the 401k as your third option. Now for my business owners making big money, the fourth option is the pension plan or DB plan defined benefit plan. These are awesome for business owners making big money and you add it on top of your 401k structure. Now if you have other employees you're going to have to factor that into the equation and look at safe harbor provisions and cliff provisions and how much do you really want to put for your employees. But it's going to allow you to put a lot of money away in a tax deferred manner inside your business far beyond the IRA or SEP or simple equation. So start meeting with your financial advisor and your tax advisor to see which structure fits you best to put away the most money that you can and get a tax deduction for it. I love this and it's going to help you better live your American dream. Thanks for listening and I hope that information was helpful and let me speak from the heart here. I've been talking about topics like this for 1015 years. I'm a CPA attorney, best selling author, radio show host and I am passionate about helping small business owners save taxes, build wealth and protect it. Please check out the link right here. Download my free ebook on 10 Common Mistakes Small business owners make in the tax and legal arena. Also check out my social media links here. I've got Daily Tips, a weekly blog radio show every week. This information is free and I'd love to help you. Click below. Find out more about me and thanks for listening.
