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Retirement Plan Options for Small-Business Owners

Many doctors, lawyers, business owners and self-proprietors miss out on the advantages of a larger employer-sponsored 401(k) plan. Often touted as one the best means for retirement savings, employer-sponsored 401(k) plans have higher contribution limits than an individual retirement account (IRA) and frequently offer matching contributions.1

However, the retirement plan market for solo operators continues to evolve. The following is an array of choices available, with some interesting options for even larger contributions than the 401(k).2

Traditional IRA

The 2019 total contribution limit (for both Traditional and Roth IRAs combined) is $6,000, with a catch-up contribution of up to $1,000 for those age 50 or older. Contributions to a Traditional IRA plan are tax-deductible if neither you nor your spouse are covered by a retirement plan at work.

Roth IRA

The 2019 total contribution limit (for both Traditional and Roth IRAs combined) is $6,000, with a catch-up contribution of up to $1,000 for those age 50 or older. Unlike a Traditional IRA, Roth contributions are not tax deductible. However, investment earnings are not taxed and qualified withdrawals are also tax-free. Note that contributions to a Roth IRA are subject to income limits. For married couples filing jointly, the adjusted gross income (AGI) threshold is $193,000 to $203,000. For single filers, the threshold is $122,000 to $137,000.

SIMPLE IRA

The 2019 total contribution limit for a Savings Incentive Match Plan for Employees, or SIMPLE IRA, is $13,000 with a catch-up contribution of up to $3,000 for those age 50 and older.

Solo 401(k)

The 2019 total contribution limit is $56,000 with a catch-up contribution of up to $6,000 for those age 50 and older. The “employee” portion of that amount is capped at $19,000 ($25,000 for age 50 and older). However, the “employer” portion is determined by a formula based on the income earner’s total compensation for the year. For 2019, the compensation limit used to calculate the employer portion is capped at $280,000.

Cash-Balance Pension Plan

This is a defined benefit plan that acts like a defined contribution plan and is available to those with 1099 (independent contractor) income. By law, the plan may accumulate up to $2.5 million, and annual contributions are determined by the participant’s age and annual income. The older you are and the less you have in the account, the more you can contribute. For example, a sole proprietor age 60 or older may be able to save up to $200,000 a year in pretax contributions. The cash-balance plan also can be combined with a profit-sharing 401(k) for even higher savings. Be aware, however, that this type of plan can be expensive to set up and maintain and requires the assistance of an actuary.You should work with an experienced advisor to determine if this option is right for your business model and financial situation.

1 Ashlea Eberling. Forbes. Nov. 1, 2018. “IRS Announces Higher 2019 Retirement Plan Contribution Limits For 401(k)s And More.”  https://www.forbes.com/sites/ashleaebeling/2018/11/01/irs-announces-2019-retirement-plan-contribution-limits-for-401ks-and-more/. Accessed Nov. 16, 2018.

2 Ibid.

3 Physician on Fire. “Cash Balance Plans: Another Retirement Plan for Professionals.” https://www.physicianonfire.com/cashbalance/. Accessed Nov. 16, 2018.

 

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