Retirement Plans for Self-Employed and Small Businesses

Working for a large-scale organization gives you a variety of retirement options such as purchasing stocks, IRAs, and 401K, but how do you supposed to have a secured retirement if you are self-employed or organizing a small business?

Retirement plans are also available for even sole proprietorship, as small business owners can set up a tax-advantaged plan for themselves and their employees. Here are some options you can do if you are an owner-employee or managing a small organization.


A Simplified Employee Pension IRA is a written plan that allows a self-employed person to contribute towards retirement and the employee’s retirements without the complexity of other retirement plans.

This type of Ira is owned and controlled by the employee and the business owner makes contributions to the financial institution where the SEP-IRA is maintained. It can be set up as late as the due date of your income tax return for that year.

Employee eligibility conditions may not be any more strict than (i.e. can be less strict): be at least 21 years of age, has worked for the employer for at least three of the previous five years, and received at least $500 in compensation for the tax year

The total contribution to an SEP-IRA account should not exceed the lesser of 25% of income (20% for self-employed before self-employed tax deduction.

Simple IRA

This is an employer-sponsored plan wherein contribution are made to a participating employee’s IRA. The tax-deferred contributions are higher that a traditional or Roth IRA.

Simple IRA are usually found in companies with less than 100 employees who want to provide an alternative to a qualified profit-sharing plan. It can also go along with a Simple 401K plan, but the employer must meet certain conditions if a Simple 401K plan is to be set up.

A Simple IRA must be set up for each employee with contributions under the plan. Employees can make salary reduction contributions in any amount to a Simple IRA plan up to the legal limits. Contribution limits for Simple plans are lower than for most other types of employer-provided retirement plans: $10,500 for 2008.

The employer may elect a matching contribution formula or a non-elective formula of 2% of compensation for all eligible employees. If a matching formula is elected:

  • The employer must match the employee’s elective deferrals up to 3% of the employee’s compensation for the year.
  • An employer can choose a different alternative for each year; the 3% match can be reduced to a minimum of 1%. The employer cannot choose a percentage less than 3% for more than 2 years during a 5 year period that ends with and includes the year for which the choice is effective
  • The employer may elect the non-elective formula of 2% of all eligible participants’ compensation. Under this formula, all eligible employees would receive this non-elective contribution whether making elective deferral contributions or not.

Payroll Deduction IRA

Employers offer this plan to their employees who wanted to save towards their retirement. Beyond setting-up the IRA, the employer has no involvement in this IRA other than forwarding contributions from the employee to the financial institution managing the funds.

Contributions are made through deductions in the employee’s payroll, with the employee deciding how much they would like to contribution to their IRA.

Employees’ tax-deferred contributions are limited:

$4,000 in 2006 & 2007
$5,000 in 2008

Additional "catch-up" contributions are permitted for employees age 50 or over. This special catch-up amount is currently limited to $1,000 per year.


Posted by Ardent Editor on Aug 7 2008 in IRAs

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