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Different Retirement Plans for Small Business Owners

By on November 07, 2022 5 min read

Penelope is a retirement platform designed specifically for small business owners. It offers a simple, affordable way to set up and manage a retirement plan without the hassle and expense of traditional retirement plans.

We are partnering with Penelope to bring affordable retirement plans to all small business owners!

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Different Retirement Plans for Small Business Owners

Many small business owners aren't aware that there are affordable retirement plans out there they can sign up for. We understand that they are too busy to think about what type of retirement plan is best for them. Luckily we've got you covered in this article! There are several different retirement plans available to small businesses, and we'll discuss the six most common retirement plans for small businesses: the traditional 401(k), the solo 401(k), the Pooled Employer Plan, the traditional IRA, the SEP IRA, and the SIMPLE IRA. We'll also provide tips on choosing the right plan for your business.

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What is a Retirement Account?

A retirement account is an investment account that allows you to set aside money for retirement. The money in the account grows tax-deferred, which means you don’t have to pay taxes on it until you withdraw the money in retirement. Each type of account has different rules about how much you can contribute when you can withdraw the money, and how the money is taxed. However, all retirement accounts share one common goal: to help you save for a comfortable retirement. Let's dive into some of the most common retirement accounts for small business owners. 

What is a Traditional 401(k) Retirement Plan?

The money that is contributed to a traditional 401(k) is not taxed until it is withdrawn. The amount that can be contributed annually is limited by the IRS. The money in a 401(k) plan can be invested in various ways, including stocks, bonds, and mutual funds.

Withdraws can be made after the age of 59 1/2 without penalty. However, if the money is withdrawn before that age, there will be a 10% penalty. There are also rules about when the money must be withdrawn. For example, once the account owner reaches the age of 70 1/2, they must start taking distributions from their traditional 401(k).

Traditional 401(k)s are a great way for small business owners and their employees to save for retirement and offer many tax advantages.

Start your Traditional 401(k) for as low as $8 a month with Penelope!

What is a Solo 401(k)?

A solo 401(k) is a retirement savings plan that is available for self-employed individuals and small business owners. The main benefit of a solo 401(k) is that it allows business owners to contribute both as an employee and as an employer up to the annual limit. This can significantly increase the amount of money that can be saved for retirement.

The rules are similar to a traditional 401(k), but some key differences exist. For example, you can contribute up to $19,000 per year ($25,000 if you're over 50) and withdraw the money before retirement age without penalty. The money is also taxed differently - contributions are made with pre-tax dollars, but withdrawals are taxed as regular income. 

Start your Solo 401(k) for as low as $8 a month with Penelope!

What is a Pooled Employer Plan (PEP)?

A Pooled Employer Plan (PEP) is a retirement plan designed specifically for small business owners. Under the rules of a PEP, businesses can pool their resources to provide retirement benefits for their employees. This can be a great way for small businesses to offer retirement benefits without having to bear the full cost themselves.

One of the key advantages of a PEP is that it allows businesses to contribute much more money towards their employees' retirement than they could under other retirement plans. The maximum contribution limit for a PEP is $56,000 per year (as of 2019), whereas the limit for an individual retirement account (IRA) is only $6,000 per year. This means that a PEP can provide a much more substantial retirement nest egg for employees.

Another advantage of a PEP is that it offers more flexibility than other retirement plans when it comes to withdrawals. Employees can begin taking distributions from a PEP at any age, and there are no required minimum distributions. This means that employees can access their retirement savings sooner if they need to, without being penalized.

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The money in a PEP is taxed similarly to other retirement accounts - contributions are made with pre-tax dollars, and withdrawals are taxed as ordinary income. However, a PEP can provide significant tax savings for employers and employees because of the higher contribution limits.

A PEP can be an excellent retirement plan option for small business owners who want to offer their employees well-rounded benefits packages. It's also a great way to save on taxes while providing for employee retirement needs.

Community (1) Fundid Recommendation: Penelope is the retirement platform for small business owners! The Penelope team is on a mission to enable every small business owner and employee to build a bright financial future. They understand small businesses and will recommend the plan that best fits your business needs, whether that's a Pooled Employer Plan (PEP), traditional 401(k), or a Solo 401(k).

Save $875 when you sign up through Fundid.

What is a Traditional IRA?

A traditional IRA is a retirement plan that allows small business owners to set aside money for their retirement on a tax-deferred basis. Contributions to a traditional IRA are typically deductible from your income taxes, and the money in the account grows tax-deferred until it is withdrawn.

Withdrawals from a traditional IRA are taxed as ordinary income. The rules for traditional IRAs state that you can contribute up to $5,500 per year ($6,500 if you are age 50 or older). The money in your traditional IRA can be withdrawn at any time, but you may be subject to penalties if you withdraw before age 59 1/2.

Traditional IRAs are an excellent way to save for retirement, and they offer the added benefit of tax breaks that can help you grow your retirement nest egg.

What is a Simple IRA?

The SIMPLE IRA is a retirement plan designed for small business owners and their employees. It is a retirement savings plan that offers tax-deferred growth and matching contributions from the employer. The SIMPLE IRA has higher contribution limits than traditional IRAs, making it an attractive option for small business owners who want to maximize their retirement savings. Employees can contribute up to $12,500 annually to their SIMPLE IRA, and employers can match employee contributions up to 3% of their salary.

Employees can begin withdrawing money from their SIMPLE IRA at age 59 1/2 and will be subject to income taxes on the withdrawals. However, employees who withdraw money before age 59 1/2 may be subject to a 10% early withdrawal penalty. Employers are not required to contribute to employees' SIMPLE IRAs, but they may choose to do so to attract and retain employees.

Penelope | Small Business Retirement

What is a Simplified Employee Pension (SEP) IRA?

A SEP IRA is a retirement savings plan specifically designed for small business owners and self-employed individuals. It offers the same tax benefits as a traditional IRA but with higher contribution limits. Under the SEP IRA rules, you can contribute up to 25% of your eligible compensation each year, up to a maximum of $58,000 in 2020. You can also make catch-up contributions if you're over 50.

The money in your SEP IRA can be invested in various assets, including stocks, bonds, and mutual funds. And unlike a traditional IRA, you're not required to start taking distributions from your SEP IRA at age 70½. You can leave the money invested for as long as you want and take withdrawals whenever you need them (although you will owe income taxes on any money you withdraw).

So a SEP IRA may be right for you if you're looking for a retirement savings plan that offers flexibility and generous contribution limits.

Which Retirement Plan is Best for a Small Business Owner?

When it comes to retirement planning, there is no one-size-fits-all solution. The best retirement plan for a small business owner will depend on several factors, including the owner's age, income, and retirement goals. The team at Penelope will help you understand your options and pick the best retirement plan for your business and your future. 

About Penelope

Penelope is a retirement platform designed specifically for small business owners. It offers a simple, affordable way to set up and manage a retirement plan without the hassle and expense of traditional retirement plans. They offer subscription-based plans for just $8 per active employee per month (with no sneaky fees–ever). With Penelope, retirement planning is easy and accessible for all small business owners.

For a limited time only, save up to $875 when you sign up with Fundid.

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About Fundid

Fundid is driven by a mission to empower business owners on their growth journeys by simplifying business finance & access to capital. 

We spend our time thinking about what the world would look like if the 80% of businesses that have under 10 employees had access to the capital they needed to grow and thrive. We're solving this with our Business Capital, Business-Building Card, and Resources that include our business Grant Match Program.

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