Most Popular Retirement Plans - Spokane Small Businesses. | Stewardship Concepts Financial Advisors

We are huge proponents of helping Spokane small businesses set up retirement plans. By setting up retirement plans, not only business owners benefit, but employees do, too. Employees are a business's greatest asset. Business thrives when employees are taken care of. Deciding which plan to use depends on your situation with a retirement plan. I'll describe some of the most popular options: A Solo (k), SEP IRA, SIMPLE IRA, and 401(k). Get the input of your accountant and financial advisor before you decide. There is no best retirement plan that's right for everyone. It will always depend on the situation.

Solo (k)

A solo(k) is only allowed if you're self-employed and don't employ anyone (besides a spouse). Often, this is a contractor receiving a 1099 wage, the early stages of a business, or a business that doesn't require employees like a real estate agent.

A solo(k) can either be a traditional or Roth plan. The difference between the two is that contributions to a traditional solo(k) reduce the taxable income in that year, and the contributions are invested and grow. In retirement, the withdrawals are counted as taxable income. But with a Roth solo(k) plan, the contributions don't reduce taxable income, grow tax-free, and are withdrawn tax-free.

In a solo(k) plan, the owner is known as the employer and an employee. This is a huge benefit because the plan allows for two types of contributions. First, as an employee, the limit works like a normal 401k. The maximum contributions for 2024 are $23,000 and an additional catch-up contribution of $7,500 if the person is at least 50.

The other type of contribution is that the employer can also make a profit-sharing contribution of up to 25% of net income. If you're taxed as an S-Corp, pay yourself $100,000 as a W2 wage, and take $50,000 in owner distributions, this calculation will be based on the $100,000. This calculation is more complicated depending on if you're an unincorporated sole proprietorship or a single-owner corporation. You should talk to your accountant and financial advisor near you to get an estimate of how much you can contribute. For those who are more DIY, use this free online tool also as a resource for the calculation: https://www.bankrate.com/retirement/self-employed-401-k-calculator/

The total contributions between the employer and employee in 2024 can be at most $69,000 and another $7,500 as a catch-up for those 50 or older.

Solo business owners in the past have utilized a SEP IRA. This allows for a 25% contribution to net income. However, since a solo(k) has been established and provides for an additional employee contribution, the SEP IRA for solo business owners has become obsolete.

A benefit of using the solo(k) plan is that it doesn't require nondiscrimination testing. The cost to set up and maintain the plan is low. To set up a Solo(k), you may open one up at Fidelity, Charles Schwab, or Vanguard if you want to DIY or utilize a financial advisor to help set up, plan and invest.

SEP IRA

A SEP IRA can be used by solo owners or businesses with employees, but because of the Solo (k), it's typically only used by businesses with employees. This plan only allows the employer to make profit-sharing contributions to the plan. All eligible participants must receive a uniform contribution. Everyone gets the same contribution percentage on their compensation (but not the same dollar amount). Unlike other plans, a benefit to the owner is that they can skip contributions to the plan when business is down.

The contribution limit is 25% of an individual's W2 income or $69,000. There are no catch-up contributions because there aren't contributions made on the employee side. There are no Roth options for a SEP IRA.

The maximum contribution calculation can be complicated. Ask your accountant and financial advisor for guidance. For those who are DIY, there's a link for a free online calculator.

Eligibility rules are unique to this plan. Employers have some flexibility in setting up the plan. The most restrictive rule is that employees who have worked three of the last five years and received at least $750 in compensation are eligible for an employer contribution.

Similar to the Solo (k), a benefit of using the SEP IRA plan is that it doesn't require nondiscrimination testing. The cost to set up and maintain the plan is very affordable. To set up a SEP IRA, someone who is DIY can open one up at Fidelity, Charles Schwab, or Vanguard or use a financial advisor for help.

SIMPLE IRA

SIMPLE IRAs are for businesses with 100 or fewer employees. It's a plan more like a traditional 401k- a name most people will recognize. The plan also doesn't require nondiscrimination testing, making it a low-cost and "simple" plan to set up. This is one of the most common solutions for many Spokane business owners.

Contributions are made as an employee contribution and a contribution from the employer. The employer's contribution is either non-elective or matching the employees up to a certain amount. The non-elective contribution is 2% of their wage whether or not the employee contributes. The match is up to 3% of the employee's contribution. For example, if the plan does a 3% match and an employee contributes 1%, the owner will contribute 1% to that person's account for a total benefit of 2%. But if another person contributes 10% to the plan, the employer will contribute another 3% for a total benefit of 13%.

Current contributions are all traditional and not Roth. Recent legislation will change this, and Roth options should be available in the coming years.

A slight drawback of this plan over others is the maximum an employee can contribute. In 2024, it's $16,000, with a $3,500 catch-up if they are 50 or older. If a business owner needs to contribute more to the plan, they may consider a 401(k). A drawback of a SIMPLE IRA is the penalty. Within the plan's first two years, there is a 25% penalty for taking an early withdrawal. After two years, but before age 59.5, the penalty drops to 10%.

To set up a SIMPLE IRA, open one up at Fidelity, Charles Schwab, or Vanguard if you want to DIY your plan and manage the investments or utilize a Spokane financial advisor for help setting up, managing, and investing.

401(k)

A 401(k) is one of the most recognizable names of retirement plans. These plans are much more flexible in their design. There is no limit to the number of participants, which is one of the reasons why large companies commonly use 401(k)s. The drawback of having this flexibility is the requirement to do discrimination testing. This testing ensures everyone is fairly treated, not just the highly compensated.

A significant benefit to 401(k) plans is the contribution limits. For 2024, an employee can contribute $23,000 with a catch-up of $7,500 for those 50 or older. For a profit-sharing contribution from an employer, there is a total maximum contribution of $69,000 or $76,500, with the catch-up in 2024.

Taking a withdrawal before age 59.5 from a 401(k) has a penalty of 10% and income tax. There are ways to get around this penalty with either some specific hardship circumstances, using SEPP ( substantially equal periodic payment method), and if you're unemployed, at least age 55, and your money is in your 401(k) or 403(b). If you have questions about your rollover options or want to explore retirement plan options, contact your Spokane financial advisor or accountant near you.

Slight variations of retirement 401(k)s exist, but most rules are the same. Other plans you may see are a government version, 457, or a nonprofit version, 403(b).

To Wrap Up

There is no best retirement plan at the end of the day, but it will depend on your situation. We are huge proponents of helping Spokane small businesses set up retirement plans because we've seen the financial security they bring in retirement for the owners and employees. Contact our Spokane financial advisor today if you're curious about what retirement plan might be right for you.