Retirement plan designs for small business owners – a primer

June 13, 2022

Do you own a business? Are you finally making money? If so, it might be time to consider a retirement plan.

This should be a fun process, although tedious, and depends (almost) entirely on two variables – profitability and number of employees.

Here are common buckets that business owners fall into and plan designs to consider. 

  1. Single employee and just starting off: If you can only save a few thousand dollars annually, and you are the only business employee, you are likely better off NOT establishing a plan under your business and instead funding a Traditional or Roth IRA. Sometimes the easy thing is the best thing. 
  2. Single employee and things are going well: If you are making money and able to save more than $6k, congratulations and welcome to the world of employer sponsored plans, we are glad you can join us. One of the best “bang for your buck” plan types is a SEP IRA. SEP stands for Simplified Employer Pension Plan. Sounds more complicated than it is. The benefit of a SEP is that it allows you to put away almost 10 times that $6k limit for individual IRAs (with a cap in 2022 of $58,000). The drawback is that you and your tax preparer will need to discuss this strategy and ensure that your tax return notates SEP contributions properly and you are eligible to establish this type of plan. Also, be aware that you are limited to 25% of your net income, thus to contribute that full $58,000, net income from your business would need to be at least $232,000. Solo 401k plans are also a useful consideration as establishing them has become very easy with custodians.
  3. Things are going well and you have a handful of employees: Once you reach this stage, 401k plans come into consideration. This will require you to work with a Third-Party Administrator to determine the feasibility and cost/benefit of establishing a 401k plan. This also allows the company AND employees to make contributions, helping your hard-working employees save for retirement and giving you the ability to contribute. This also opens up the feasibility of establishing a Roth 401k option as well. During this process, it is also worthwhile to explore the ability to contribute to an after-tax account within your 401k to create a “mega backdoor” Roth. 
  4. Things are going really, really well and you have more money than you know what to do with: Congrats and welcome to the world of Cash Balance plans. This can be in addition to a 401k plan or a standalone plan without a 401k plan integration. Cash Balance plans are a form of a pension plan that allow the company to set aside funds for employees based on earnings and age (hence the pension aspect). The real benefit is the amount of funding you can deposit into a cash balance plan annually. With a cash balance plan, you can theoretically contribute more than $300k annually into your various retirement plans and thus defer taxes on that amount. This does add complexity and commitment as Cash Balance Plans can’t be establish and shut down in consecutive years. 

Want to discuss which plan makes sense for you? Schedule a call with us. 


This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

Frankly Finances is a registered investment advisor with the state of Florida and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration does not imply a certain level of skill or training. Please refer to our Form ADV Part 2A disclosure brochure for additional information regarding the qualifications and business practices of Frankly Finances.

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