Owner Retirement Plans and Tax-Advantaged Benefits
Retirement plans are one of the few tools that lower taxable income now and build long-term savings at the same time. For owners of small businesses, the right plan depends on whether you have employees, how much you earn and how much you want to save.
Common plan types
| Plan | Best fit | Notes |
|---|---|---|
| SEP IRA | Simple setup, mainly employer contributions | Easy to start; contributions are generally tied to compensation and can be made as late as the return deadline |
| SIMPLE IRA | Small employers that want a low-cost plan with employee deferrals | Lower limits than a 401(k) but lower administration |
| Solo 401(k) | Owner-only businesses (or spouse-only) with substantial income | Allows both employee and employer contributions; annual limits are set by the IRS |
| 401(k) with employees | Businesses with staff that want flexible contributions | Requires plan administration and testing; can be paired with profit sharing |
| Cash balance plan | Established, consistently profitable practices or firms with high owner income | Can allow much larger deductible contributions for older owners; requires actuarial work and ongoing funding |
Contribution limits change every year
The IRS adjusts retirement contribution limits annually for inflation. Use the current year's published figures, and check that your plan document permits the contribution type you plan to make. Missing a plan deadline can mean losing a deduction for that year.
Accountable plans
An accountable plan lets a business reimburse an owner-employee for ordinary business expenses, such as a home office, a phone, mileage or certain travel, without the reimbursement being taxed to the owner. To qualify, the expenses must be business-related, substantiated, and returned to the business within the required time frames.
Health-related and other benefits
- Health Savings Accounts. Contributions made through the business or payroll are generally tax-free when used for qualified medical expenses. Eligibility depends on the type of health coverage.
- Health insurance premiums. Special rules apply to premiums for owners of S corporations and other entities. How they are reported affects both income tax and payroll tax.
- Dependent care and education benefits. These can be offered through written plans with their own limits and rules.
Planning sequence
- Estimate your taxable income for the year, using the mid-year projection described in our year-round planning guide.
- Choose a retirement plan that matches your headcount and savings goals.
- Decide how much to contribute, and set a reminder for the funding deadline.
- Document any accountable plan reimbursements as they occur.
- Review the plan each year as income and staffing change.
Plan design and administration are often best handled with a CPA or plan provider who can run the numbers for your situation. PremCPA.com and SmallTax.com are two places to look for that help.
General educational information only, not tax, legal, investment or retirement plan advice. Limits, eligibility rules and deadlines change. Confirm current figures with the IRS and a qualified professional before acting.