When you decide to leave your W-2 job and take the plunge into entrepreneurship, one of the questions that may make you scratch your head is “How do I save for retirement now?” Fortunately, small business owners have several options for retirement planning — here are the details on three of the most common plans for the self-employed.
Contribute to a Solo 401(k) account
If you’re a business owner who works alone (that is, you don’t have any employees) you may qualify for a solo 401(k).
Because you are acting as both an “employee” and “employer” with a solo 401(k), you can contribute a total of up to $69,000 for 2024. Here’s how that breaks down: As an “employee” of your own business, you can defer up to $23,000 of your earned income for 2024 or 100% of your compensation, whichever is less. Then, as an employer, you can contribute up to 25% of your compensation to the account.
The $69,000 total contribution limit doesn’t include catch-up contributions if you’re over age 50. For those over the age of 50, you can make catch-up contributions of $7,500 per year (which means if you qualify, you could potentially contribute $76,500 in 2024).
Also, keep in mind that if you’re employed at another company (like a day job) these limits apply across the board, so you can’t try to contribute additional money beyond these limits by having both a business and a day job.
Solo 401(k) Breakdown
| Eligibility | Individuals who are self-employed or own a business with no employees aside from their spouse. |
| Contribution limits | $69,000 for 2024 for individuals under age 50; $76,500 for 2024 for individuals over age 50. |
| Income limits | $345,000 for 2024 |
| Taxes | Pre-tax money grows tax-deferred until retirement and withdrawals made in retirement get taxed as regular income. |
Open a traditional IRA
An IRA is one of the simplest ways for anyone to save for retirement regardless of whether they’re self-employed or a W-2 employee. That’s because it’s an individual retirement account, which means you don’t need to set it up through your workplace or business.
With a traditional IRA, you contribute pre-tax dollars to your account and it grows tax-deferred until you make withdrawals in retirement. Then you’ll pay taxes when you make withdrawals in retirement. A Roth IRA is another solid option except that you contribute after-tax dollars to this account and when you make withdrawals in retirement, you won’t owe taxes on the distribution.
For 2023, you can contribute up to $6,500 if you’re under the age of 50. In 2024, the contribution limit will increase to $7,000.
You can open up either a traditional IRA or Roth IRA at many financial institutions, including Charles Schwab, which CNBC Select ranks as the best overall IRA account. It has a $0 minimum deposit for investing and offers an extensive selection of retirement planning tools.
Several robo-advisors, such as Betterment, give you access to IRA accounts. Betterment collects information about your personal preferences, like your risk tolerance, time horizon until retirement and goals and it invests in the right portfolio for you and automatically adjusts your asset allocation based on those factors as time goes on.
Traditional IRA Breakdown
| Eligibility | Any individual with earned income. |
| Contribution limits | $7,000 for 2024 for individuals under age 50; $8,000 for 2024 for individuals over age 50. |
| Income limits | None for a traditional IRA; for a Roth IRA, income limits depend on your tax filing status and modified adjusted gross income. |
| Taxes | For a traditional IRA, you pay taxes on withdrawals made in retirement; for a Roth IRA you pay taxes before contributing and won’t get taxed on your withdrawals in retirement. |
Consider a SEP IRA
A Simplified Employee Pension (SEP) IRA is ideal for businesses of any size, including if you have just a few employees. With this type of retirement plan, employees don’t have to contribute anything — rather, the employer (a.k.a., you as the business owner) makes all contributions into a traditional IRA for employees, including yourself.
There are also some guidelines about who is considered an eligible employee for this type of retirement plan. An eligible employee must:
- Be age 21 or older
- Has worked for the employer for at least 3 of the last 5 years
- Has received at least $750 in compensation for 2024
Employers must contribute either $69,000 for the year 2024 or up to 25% of the employee’s compensation, whichever is smaller. There are no catch-up contributions for SEP IRA plans.
The SEP IRA route is more complicated compared to the other options since it involves more paperwork and has additional guidelines about who is considered eligible to participate.
SEP IRA Breakdown
| Eligibility | Open to almost any type of business, including sole proprietorships, S and C corporations, LLC’s, self-employed individuals and partnerships. |
| Contribution limits | $69,000 for 2024 or up to 25% of the employee’s compensation (20% if you’re self-employed), whichever is less. |
| Income limits | $345,000 for 2024 |
| Taxes | Distributions in retirement are taxed as ordinary income. |
Bottom line
If you’re running a small business and worried about how you’ll save for retirement, the good news is that you have several options to choose from. It can be helpful to start with the simplest one, which is to open a traditional or Roth IRA and contribute. Then, as your business grows or your needs change, you can consider a more complex option like a SEP IRA.
