Self-directed Retirement Plans For Business Owners and the Self-Employed

Published on December 7, 2023

Business owners and self-employed taxpayers have several options in terms of retirement plans. And best of all, they can self-direct these plans if they wish to include alternative assets to build retirement wealth. Here’s a look at what’s available outside of qualified defined contribution or defined benefit plans for small-business owners and the self-employed.

Retirement plans for small-business owners

• SIMPLE IRA – the “SIMPLE” stands for savings incentive match plan for employees. This plan is for small businesses with under 100 employees as well as the self-employed (with certain restrictions). It is a good option for employers who don’t yet offer a qualified retirement plan at work but want to help employees save for retirement. Only businesses that do not have any other retirement plan may establish a SIMPLE IRA.

A SIMPLE IRA is a Traditional IRA in that the money grows tax deferred. The business owner sets up an IRA account for each eligible employee. In addition to each participant making contributions (which is discretionary), the employer is required to contribute to each account, either as a match to participants’ contributions (up to 3% of employee compensation) or as a fixed 2% of each eligible employee’s pay. Employees can roll over funds from an existing Traditional IRA to their SIMPLE IRA account.

For those who are self-employed or for any participant in a small-business plan, it offers higher savings potential in a tax-advantaged account than a regular IRA. The contribution limits for SIMPLE IRAs in 2024 will be $16,000 for participants under age 50 and $19,500 for those 50 and older.

• Employee contributions made through payroll deductions must be done within 30 days of the last day of the month in which the funds would have been paid to the employee.
• Employer contributions must be made by the federal income tax return deadline; this includes extensions.

People who participate in a SIMPLE IRA have complete control over their accounts. By self-directing the investments within one’s account, employees can diversify and build up the value of their portfolios.

Participating in a SIMPLE IRA does not exclude people from being part of another employer-sponsored plan, so employees with more than one job can be in your SIMPLE IRA and contribute additional funds to another plan (up to a total of $23,000 next year).

Setting up a SIMPLE IRA is relatively easy. Next Generation’s SIMPLE IRA starter kit has step-by-step instructions for business owners and participants to follow.

• SEP IRA – this is a simplified employee pension (SEP) plan. It offers more flexibility than a SIMPLE IRA in that businesses of any size, including the self-employed, can establish a SEP.

A SEP IRA is also a Traditional IRA set up for each eligible employee. But unlike the SIMPLE IRA, only the employer contributes to the plan.

• Employers can contribute up to 25% of each participating employee’s pay with a ceiling of $69,000. For the self-employed, this figure is a 25% deduction from net self-employed income.
• The contributions are tax-deductible, which makes these plans attractive to small-business owners.
• However, any contributions you make on behalf of eligible employees (as deemed eligible by the IRS) must be an equal percentage of compensation to what you as the business owner contribute to your account.
• Employer contributions must be made by the federal income tax return deadline, including extensions.

Because all contributions fall solely on the business owner, SEP IRAs are generally a good option for business owners with few employees or for self-employed individuals funding only their own retirement account. All participants are always 100% vested in the money in their account.

If you’re considering setting up a SEP IRA for yourself and/or your employees, we recommend you discuss this option with your trusted financial advisor or CPA, and compare the benefits and features to those of a SIMPLE IRA. The IRS offers guidance as well. We also invite you to review our SEP IRA starter kit and contact our team for assistance or answers to your questions.

• Solo(k) – this is a one-participant 401(k) plan for solopreneurs/business owners who do not have any employees but want the benefits of a qualified workplace retirement plan. The solo(k) can cover both the business owner and spouse. To open a solo(k) you must have an employer identification number (EIN).

The contribution limit in 2024 will be $69,000 (like the SEP IRA)—but the owner can also do a catch-up of $7,500 for those 50 or above. However, as the single participant, you are both the business owner/employer and the employee when it comes to contributions.

• As the employee, you may contribute up to $23,000 or 100% of your compensation, whichever is less (in 2024) plus the catch-up amount of $7500 if you are 50 or older.
• As the employer, you are allowed to make an additional profit-sharing contribution of up to 25% of your compensation or net self-employment income. That calculation is your net profit minus half your self-employment tax and the plan contributions you made for yourself.

With the Traditional 401(k), contributions reduce your income in the year they are made, and distributions are taxed as ordinary income. In a Roth solo 401(k), there are no initial tax breaks (money is taxed going in) but distributions are tax-free. As always, we recommend you consult with your financial planner and tax professional to determine which retirement plan is best for your business and financial circumstances.

As with many retirement plans we administer, we offer a solo(k) starter kit with step-by-step instructions to establish and fund your account.

Self-directed SIMPLE IRAs, SEP IRAs, and solo(k)s

As a business owner, you’re already accustomed to being the top decision maker at work. With a self-directed SIMPLE IRA, SEP IRA, or solo(k) plan, you’ll be the one making all your own investment decisions . . . and take advantage of alternative assets you already know and. Doing so enables you to contribute more to your account compared to a regular IRA—and you can create a more diverse retirement portfolio by including a broad array of nontraditional investments.

If you have questions about the types of investments allowed through self-direction, or how Next Generation works as both the full-service administrator and custodian for these plans’ assets, let’s talk! We invite you to schedule a complimentary educational session to find out more, or contact our helpful team at NewAccounts@NextGenerationTrust.com or (888) 857-8058.