Top 5 retirement plans for entrepreneurs

Start-up female entrepreneurFor many entrepreneurs and small business owners, retirement planning is not on the top of the priority list.  Instead, they are often buried in the day to day aspects of running their business.  In fact, according to the recent Transamerica Retirement Study, nearly half of small businesses offer no retirement plan option.  However, with social security benefits falling short of meeting the income needs of retirees, entrepreneurs and their employees must take action in order to secure their own retirement.  The good news is there are many retirement planning options that businesses can leverage to help their employees and themselves stash funds away for the future while also reducing significant tax liability.

More cost effective than you think

One of the biggest misconceptions business owners have about retirement plans is that they are too costly.  Specifically, improvements in fee disclosures has led to greater transparency and fee reductions in the industry – a win for retirement plan sponsors and participants.  In fact, you do not have to be a Fortune 500 company to offer diverse investment choices within a competitive fee structure.

From tax credits for startup costs (a credit equal to 50 percent of the cost to set up and administer the plan up to a maximum of $500 per year for the first 3 years may be available) to tax deductions for contributions, a retirement plan often provides significant net after-tax benefits for the business owner and their employees – providing a true win-win for all parties involved.  So which plan is right for your company?

The go-to plan – 401(k)

The 401(k) remains the go-to retirement plan for many companies.  With the option for either pre-tax contributions or after-tax contributions (if a Roth 401(k) is offered) of up to $18,000 per year plus an over age 50 catch-up of another $6,000, the 401(k) can be fantastic tool.  Safe Harbor provisions of either a 4% match or 3% non-elective contribution will help your plan to pass testing while rewarding employees for their contributions to your company.  Keep in mind that certain employees such as part-time workers or those that have been employed for less than 1 year can be excluded if necessary.

401(k) plans can be a great option but they can require certain testing, a fidelity bond and the filing of a form 5500.  While this may seem complicated, plan administrators or an advisor that specializes in retirement plans can help systemize and simplify this process, enabling the business owner to focus their time on other business development areas.

Add a profit sharing plan

For entrepreneurs experiencing growth with a desire to ramp up their tax-deferred savings, adding profit-sharing can increase total contributions (including 401(k) elective deferrals & any matching contributions) to $53,000 – possibly resulting in huge tax savings.  Total contributions of up to $59,000 are available for those over age 50.  While profit sharing contributions must be made for employees too, using features like new comparability, social security integrated and other methods can help both owners and their employees benefit from contributions.  Additionally, vesting schedules can be implemented to reward employees who stick around long enough to receive their full profit-sharing contributions. Keep in mind, projections can be run prior to committing toward a profit sharing plan to confirm that it makes sense from both a tax and cash flow perspective.  Be sure to review with your accountant first.

One participant 401(k) plan

For business owners without any employees other than their spouse, a one participant 401(k) plan can be a great option.  The plan allows the same contributions as a traditional 401(k) profit sharing plan (total of $53,000 or $59,000 for those over age 50), but does not require testing.  Additionally, no form 5500 filing is required until the account has more than $250,000 in assets.  It is basically a simplified version of the 401(k), designed for companies with no employees.

The Simple IRA

Just as the name implies, the Simple IRA was designed to reduce the administrative work of a 401(k) plan.  According to the IRS, “It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.”  Owners and their employees can save up to a maximum of $12,500 for 2016 with over age 50 catch-up contributions of $3,000.  Additionally, the employer is generally required to either match each employee’s contribution up to 3% of compensation or make a 2% non-elective contribution.  There is some flexibility to reduce the match to 1% for no more than 2 out of 5 years if necessary.  While the plan is certainly simple, lower maximum contribution levels can hold back entrepreneurs and their employees from taking full advantage of available tax-deductible savings.


Simplified Employee Pension (SEP) plans are yet another simple way to save for retirement.  A SEP does not have the start-up and operating costs of a conventional retirement plan and allow for a contribution of up to 25 percent of each employee’s pay.  The primary downside is that employees are unable to stash away their own savings.  Since all contributions come from the employer, a SEP IRA can also be quite costly for the business owner depending on the number of employees.  Additionally, contributions may not be deductible on your state income tax.  As administrative burdens have been reduced in 401(k) plans, SEP IRAs have become less popular.

Cash balance plans

For high-income business owners that are nearing retirement and want to supercharge their pre-tax savings, the cash balance plan deserves a careful look.  This defined benefit plan tends to work best for owners age 60 and older, allowing for pre-tax contributions of nearly $200,000 to be made – a significantly higher sum then is available in a traditional 401(K) profit sharing plan.  While contributions are skewed toward older participants including the owner, all employees will receive contributions and benefit from the plan.  While there are many advantages, a cash balance plan isn’t right for everyone.  Since it is a defined benefit plan, it is not designed to be discretionary.  In other words, you are unable to start and stop contributions at will.  Instead, it is designed to be a longer term plan for companies with solid cash flow that want to save large tax advantaged amounts.

Now is the time for entrepreneurs to take action to reduce their tax liability, save for retirement while also empowering their employees to save towards their own goals too.  Since each company’s situation is unique, consider speaking to your tax and financial advisers to determine the most appropriate plan for you.

Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor.  He can be reached for questions at 732-280-7550,, & LPL Financial Member FINRA/SIPC.