Running your own business gives you flexibility, but it also gives you enormous responsibility. It’s not like having a regular job where companies often help set up pension plans. You need to arrange your own retirement savings as an S corp owner.
This is important because it ensures financial security after you stop working. How do you know the best retirement plan for S Corp owners?
This blog will explore S Corp owner retirement plan options for you. Whether you are the sole owner of an S corp or there are other owners, finding the right retirement plan will help your financial health in the long run.
Retirement Plan Options for S Corp Owners
Choosing the best retirement plan for S Corp owners is not a one-size-fits-all situation. You need to be realistic about what works best for your business structure and personal financial goals. Here are some standard retirement plans for S Corp owners:
1. Solo 401k
The Solo 401k is a fantastic Single Owner S Corp retirement plan option. Its design works if you are the sole owner with no employees other than yourself and your spouse. This plan is great because you can contribute as both the employer and the employee, making the most of your potential savings.
As an employee, you can contribute a portion of your salary and receive additional tax-deductible employer contributions. You can then enjoy tax-deferred growth on investments. Solo entrepreneurs seeking a high contribution limit to grow their retirement savings should consider this option.
2. SEP IRA
A Simplified Employee Pension (SEP) IRA is a solid retirement plan for S corp owners who need simplicity and flexibility. If you have a handful of employees or your profits tend to fluctuate, this retirement plan option could be a good fit. It’s a straightforward way to handle retirement savings because it’s easy to set up and maintain, with minimal paperwork.
Contributions are flexible, so you can decide how much to contribute based on your business’s performance. The contributions are also tax-deductible, lowering the taxable income of the company. This means your SEP IRAs allow you to contribute more when business is good and less during leaner years.
3. SIMPLE IRA
The SIMPLE IRA is a retirement plan option for S corp owners with under 100 employees. It doesn’t require as much heavy lifting as a Solo 401(k) or SEP IRA. The contribution limits are generally lower, but it’s worth considering if you want a retirement plan that’s easy to manage without all the bells and whistles. As the owner, you can also benefit from this plan.
These plans are popular because startup and maintenance costs are low. As an employer, you also get a tax deduction for contributions made to employee plans. Retirement plans for businesses are a benefit and not a necessity. If you want a cost-effective option, SIMPLE IRAs suit small businesses.
4. Traditional IRA
Traditional IRAs are a retirement plan option for S corp owners looking for a personal retirement savings plan with tax deferrals. This plan allows you to contribute pre-tax income into a retirement account where investments grow tax-deferred until withdrawals begin at retirement age.
Traditional IRA retirement deductions for S Corp owners may be limited if a work retirement plan covers the owner or their spouse. The deduction rules depend on your filing status and income. Taxes on earnings are deferred until withdrawal when they’re taxed as ordinary income. This can be helpful if you’re in a lower tax bracket when you retire.
5. Roth IRA
Unlike Traditional IRAs, Roth IRAs are funded with after-tax dollars but offer tax-free growth and tax-free withdrawals in retirement. This makes them an attractive retirement plan option for S corp owners anticipating a higher tax bracket during retirement.
Roth IRA retirement deductions for S Corp owners are not tax-deductible regardless of your income level. However, you do get the benefit of tax-free withdrawals. Tax-free retirement income is a significant advantage if tax rates rise, or your income is higher during retirement.
Can S Corp Have a Defined Benefit Plan?
Yes, an S corporation can set up a defined benefit plan. A defined benefit plan pledges a specific amount each month when you retire. These are ideal for high-income business owners who want to save as much as possible for retirement while reducing their taxes.
What Retirement Accounts Should I Have as a Business Owner?
As a business owner, you can have different types of retirement accounts to save for the future. This includes a Solo 401k, SEP IRA, SIMPLE IRA, traditional IRA, and a Roth IRA. The right combination depends on your income, business size, tax situation, and retirement plans. Ideally, you should seek advice from a financial planner to help you determine the best retirement plan for an S Corp owner.
Can an S Corp Owner Have a SEP IRA?
Yes, S Corp owners absolutely can use a SEP IRA. The main advantage of SEP IRAs lies in their simplicity and flexibility. Setting one up is a breeze; you can decide how much you want to contribute each year. This is handy when your business earnings fluctuate from one year to the next.
Can an S Corp Owner Have a 401k?
Yes, an S corp owner can have a 401k plan. If you’re the only employee, then a Solo 401k is a great option. You get to double dip and save as both the employee and the employer. However, if you aren’t sure if this plan suits your retirement plans, consult a financial advisor.
Choose the Best Retirement Plan for You
Choosing the best retirement plan for an S Corp owner can be challenging. You need to examine the financial standing of your business and your own retirement goals. Fortunately, the team at Asset Preservation Wealth and Tax offer a holistic 360-approach. We consider everything from tax planning to retirement goals to help you prepare for the future.
Talk to a trusted financial planner today!
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor to be sure a Roth IRA conversion fits into your planning strategies.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
