Retirement Plans for Micro Business Owners

When you run your own business, no one sets up a retirement plan for you. You have to do it yourself. The good news: there are plans built for people with just one employee (you) or a handful of workers, and setting one up is easier than most people expect.

Here is a look at the main options.

Why bother with a business retirement plan?

There are two big reasons:

• You save for your future when there is no employer doing it for you.
• Contributions may lower your taxable income now. How much you save on taxes depends on your income and situation, so check with a tax professional.

You can also open a regular personal IRA on your own. But the plans below often let you save more money each year.

Common plans for very small businesses

Solo 401(k)

Best for: a business owner with no employees (a spouse can be included).

• Lets you contribute both as the "employee" and as the "employer," so you can often save a larger amount.
• More paperwork than the simpler plans, especially once your balance grows.
• Not a fit if you have employees other than a spouse.

SEP IRA

Best for: solo owners or businesses with a few employees.

• Simple to set up and low maintenance.
• Only the employer (you) contributes. If you have employees, you generally have to contribute the same percentage for them as you do for yourself.
• Contribution limits are based on a percentage of your income and change over time.

SIMPLE IRA

Best for: small businesses that want employees to be able to contribute too.

• Employees can put in part of their pay, and you as the employer make a matching or set contribution.
• Easier and cheaper to run than a full 401(k).
• Contribution limits are usually lower than a Solo 401(k) or SEP IRA.

Traditional or Roth IRA

Best for: getting started right away with almost no setup.

• You open this on your own, separate from your business.
• Lower contribution limits than the plans above.
• A Roth IRA is funded with money you have already paid tax on, so qualified withdrawals later can be tax free.

How to choose

Ask yourself:

1. Do I have employees? If it is just you (or you and a spouse), a Solo 401(k) or SEP IRA gives you room to save more. If you have staff, look at a SIMPLE IRA or SEP IRA.
2. How much can I realistically put away? If it is a small amount to start, a plain IRA may be enough for now.
3. How much paperwork do I want? SEP and SIMPLE IRAs are the easiest. A Solo 401(k) takes a bit more effort.

A few things to keep in mind

• Contribution limits and rules change from year to year, so confirm current numbers before you set an amount.
• Deadlines to open a plan and make contributions vary by plan type and can differ from the regular tax filing date.
• Rules can vary by state and by your specific situation.

Next steps

1. Pick the plan that matches your business size and how much you want to save.
2. Open the account through a bank, brokerage, or payroll provider. Many offer these plans with no or low fees.
3. Set up automatic contributions if you can, even small ones, so saving happens without you thinking about it.
4. Talk to a tax professional to confirm the limits and tax benefits for your situation.

Starting small is fine. The important part is starting.