Sole-proprietors and small business owners have many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans.
A retirement plan has lots of benefits for you, your business and your employees. Retirement plans allow you to invest now for financial security when you and your employees retire. As a bonus, you and your employees get significant tax advantages and other incentives.
- Employer contributions are tax-deductible.
- Assets in the plan grow tax-free.
- Flexible plan options are available.
- Tax credits and other incentives for starting a plan may reduce costs.
- A retirement plan can attract and retain better employees, reducing new employee training costs.
Savings Incentive Match Plan for Employees (SIMPLE IRA Plan)
The amount the employee contributes to a SIMPLE IRA cannot exceed $12,000 in 2013 and 2014.
If permitted by the SIMPLE IRA plan, participants who are age 50 or over at the end of the calendar year can also make a catch-up contribution of $2,500 for 2013 and 2014.
Simplified Employee Pension (SEP)
- 25% of the employee’s compensation, or
- $51,000 (for 2013, $52,000 for 2014).
One-Participant 401(k) Plans
A one-participant 401(k) plan is sometimes called a:
- Solo-k or Solo 401(k)
- One-participant k
The one-participant 401(k) plan isn’t a new type of 401(k) plan. It’s a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.
Contribution limits in a one-participant 401(k) plan
The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:
- Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
- $17,500 in 2013 and 2014, or $23,000 if age 50 or over; and
- Employer non-elective contributions up to
- 25% of compensation as defined by the plan, or
- for self-employed individuals, see discussion below
Total contributions to a participant’s account, not counting catch-up contributions, cannot exceed $51,000 for 2013 and $52,000 for 2014.