A Small Business Wake-up Call

Small business owners and self-employed workers concerned about retirement investing should consider specialized IRA plans.

5 min read

Imagine no longer popping awake in the middle of the night worried about how (or if) retirement will become a reality. Imagine skilled workers joining your small business—and staying. It all starts with planning.

Bakery owners up to their elbows in cake batter probably don’t have a lot of time on their hands for retirement planning. And freelance journalists scrambling to string together writing contracts might assign a higher priority to cash flow, living in the present at the expense of a secure future.

Those are just examples. The broader point is, enterprising operators of companies that employ 1 to 100 might be so intent on keeping the lights on or funneling any extra cash into growing the business that their vision for the long haul might get buried under a pile of obligations. In fact, although more than 10 million Americans called themselves their own “boss” as of late 2013 (up 14% from 2001), a TD Ameritrade Holding Corp. poll revealed that seven in 10 self-employed people aren’t saving regularly, if at all.


FIGURE 1: MANY BALLS IN THE AIR. Income volatility is a primary reason that smallbusiness owners and the self-employed put off saving for retirement. Other demands are ever-present. Source: TD Ameritrade Holding Self-Employment and Retirement Survey by Head Research.

Living longer is generally a good thing, of course. However, there are many modern-day complications for retirement planning, including a strained Social Security program, volatile financial markets, and a real risk that college tuition and help for elderly parents could be needed at the same time. But small-business owners and their employees seem to shoulder a greater burden (see figure 1).

“Many of the self-employed recognize how important retirement savings is, but they’re more likely to be living in the here-and-now and they have unpredictable income that can make savings a challenge,” says Dara Luber, Senior Manager, Retirement, at TD Ameritrade. “Business owners are sometimes put off by what they perceive as the hassle and costs of plan administration, but it may be easier and more affordable than many believe— and can include tax benefits.”

Proprietors may not realize that there are specialized individual retirement accounts (IRAs) and select 401(k)s designed for small businesses and solo shops, each with pros and cons. For starters, make sure all the principals in a small business are on the same page (this includes your significant other). And get your tax advisor involved early on.

For now, some basics:

A SEP (Simplified Employee Pension) plan IRA may be attractive for its fairly high annual contributions and minimal paperwork, whether or not you have employees. It also gives you the flexibility to vary contributions— or skip them entirely—according to your yearly business needs. A SEP IRA can be ideal for a sole proprietor. Annual contributions can be as high as 20% of net self-employment income for an owner—up to $52,000 in 2014. However, there are a few caveats if you have employees: all contributions are made by the employer, not the employee. And, as an employer, you’re required to contribute the same percentage of an employee’s compensation as you contribute for yourself. So, costs may come into play.

Because this choice offers higher contribution limits, an individual 401(k) or an individual Roth 401(k) can be a great choice for contributing a lot, but it’s only available if you work for yourself or your only employee is your spouse. It requires more paperwork than a SEP, but allows 20% of net selfemployment income for the business owner, plus an additional $17,500 in salary deferrals for 2014, with a maximum of $52,000 for this year. If you’re 50 or older, you can contribute an additional $5,500, bringing the maximum to $57,500. Your employed spouse can also contribute up to $17,500 in salary deferrals (plus a catch-up contribution of $5,500 if he or she is age 50-plus). And you, as the employer, can match that contribution up to 25% of salary. This plan allows you to borrow against your savings.

A SIMPLE (Savings Incentive Match Plan for Employees) IRA is available to companies with 100 or fewer employees. With this plan, employees make their own retirement contributions—up to $12,000 for 2014, with a catchup contribution of $2,500 for those 50 or older. As the employer, you’re only required to make a small matching contribution (1–3% of employee compensation). Although your financial obligation as an employer is less, the contributions you can make for yourself are also significantly lower than for a SEP IRA or individual 401(k). Yep, you’re subject to the same rules as your employees.

This can be a smart individual choice that offers tax benefits. You can contribute to both a small business retirement plan and a Traditional IRA and potentially get a tax deduction for each, depending on your income. The maximum for 2014 is $5,500 with a $1,000 catch-up contribution if you’re 50 or older.

Offering rewards on a sliding scale, this choice may fit businesses with varying profits and, importantly, varying contributions from staff toward those profits.

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Small-business retirement tools and supportive guidance.

You Have Vision. Use It

Think of the intimidating first step you took to even hang out your own shingle. Now admit that your business can only be truly successful if you and your staff feel some degree of security.

Of course, keeping that stash under lock and key may pay off in the long run, but the beauty of small business retirement plans is in their flexibility should your oven go on the fritz or poor health demand immediate attention. In other words, what are you waiting for?

The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.

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TD Ameritrade does not provide tax advice. We suggest that you seek the advice of a qualified tax-planning professional with regard to your personal circumstances before contributing to an IRA.


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