- SIMPLE IRA—Employers with no more than 100 employees who earned $5,000 or more on the payroll for the previous calendar year can open a SIMPLE IRA (individual retirement account) for themselves and their employees. However, since contribution limits are lower than those for other plans, some experts recommend these plans for even smaller companies with fewer than 10 employees. SIMPLE IRAs also are easy to set up—good news for busy small-biz owners.
- SEP IRA—SEP IRAs are just as easy and inexpensive to set up as SIMPLE IRAs, but a SEP IRA allows business owners to put quite a bit more away for retirement. Self-employed individuals can contribute 25% of net income (that's gross income minus expenses), up to $49,000.
- Solo 401(k)—Also known as a defined contribution plan, a Solo 401(k) allows business owners to save more than they can with a SIMPLE or SEP IRA. Owners can contribute up to $16,500, plus 25% of compensation if profit-sharing is added to the plan. Self-employed individuals with no employees other than a spouse can take advantage of the Solo 401(k). Setting up these plans requires a little work.
- Defined benefit plan—Business owners can save the most with this plan—up to $195,000 a year—but there's a catch. Defined benefit plans are complex and expensive to set up, and individuals must work with an actuary to find out exactly how much they can contribute. Defined benefit plans also offer less flexibility than other plans, since they require a yearly contribution. Still, for business owners looking to sock away as much money as possible for retirement, this plan can be a good option.
Published October 4, 2010