Retirement Account Options for Entrepreneurs

Retirement Account Options for Entrepreneurs
Are Any of These Six Common Options the Right Retirement Plan for You?

If you’re an entrepreneur, you know there are many benefits. You get to be your own boss, make your own hours, and spend your working days on building something you’re passionate about. Of course, you must give up things like structure and job benefits in favor of this freedom and flexibility, and you’ll need to take matters into your own hands when it comes to your retirement plan, too.

Luckily, an entrepreneur has many favorable options to choose from. Read on to learn about six of them.

1. IRAs (Traditional and Roth)

If you’re looking for the simplest place to start, an IRA is a smart retirement plan for an entrepreneur. In 2023, the contribution limit is $6,500 (and $7,500 for those aged 50 and older). There are two types to choose from:

  • Traditional IRA: This type of account is funded with pre-tax dollars, and it lets you deduct your contribution amount on your tax returns annually. However, you’ll pay income tax on all the withdrawals you make in retirement, including any compounded gains.
  • Roth IRA: You fund a Roth with after-tax dollars, meaning you won’t have to pay income tax later on when you make withdrawals. You won’t get an immediate tax deduction, but your growth is tax-deferred.

Traditional and Roth IRAs can be opened at nearly any brokerage firm. This means you can invest in publicly traded assets such as stocks, bonds, REITs, ETFs, and mutual funds. While both types of retirement accounts have advantages, it’s also important to note a critical distinction: Traditional IRAs are subject to required minimum distributions (RMDs), but Roth IRAs are not.

2. Self-Directed IRA

This is a less simple option for an entrepreneur, but it can be a particularly smart retirement plan for those who would be considered advanced investors, as well as those who are professional real estate investors. The contribution limit for 2023 is the same as for Traditional and Roth IRAs – $6,500 for those under age 50 and $7,500 for those age 50 and over.

If you’re an entrepreneur who is less interested in investing in publicly traded assets in your retirement plan, this option may work well for you. It allows you to invest in private assets that you know well, with the classic example being real estate. You’ll likely experience less volatility than with the stock market but note that you’ll be required to pay a custodian to ensure you remain in compliance with all IRS rules and regulations.

If you have special expertise in, say, real estate, a self-directed IRA may make sense. However, there are barriers to entry for the average entrepreneur, including bureaucratic red tape and capital. If you’re the latter, this type of retirement plan may be more trouble than it’s worth.


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3. SEP IRA

If you’re an entrepreneur who is self-employed but you have no employees, a Simplified Employee Pension (SEP) IRA may be the ideal retirement plan for you. It’s specifically designed for self-employed individuals and micro businesses. Many small family businesses rely on them, and they offer immediate tax deductions. The contribution limit for 2023 is the lesser of $66,000 or 25% of your compensation. Unlike the IRAs discussed above, there is no catch-up option for those over the age of 50 to contribute additional dollars.

An entrepreneur can open a SEP IRA at most major investment banks and choose to invest in any type of security. There is no Roth option for this type of IRA, so while your annual contributions will be tax deductible, you’ll pay taxes on withdrawals in retirement. Note that, if you do have employees, SEP IRA regulations say that the employer must contribute to employee accounts with contributions identical to what the account owner contributes.

4. SIMPLE IRA

If you’re an entrepreneur with 1-100 employees, this could be a useful small business retirement plan for you. The contribution limit for 2023 is $15,500. Those 50 and over can make an additional catch-up contribution of $3,500.

A SIMPLE IRA is often likened to a simpler alternative to complex and expensive 401(k) retirement plans. It’s a smart option for small businesses, but an entrepreneur with more than 100 employees cannot use it. Employers must also offer to contribute to employee accounts, but the percentage can be less than what the entrepreneur contributes to their own – an advantage over the SEP IRA retirement plan.

SIMPLE IRAs are opened through regular brokerage firms, so retirement plan participants can choose to invest in any securities they’d like.

5. The Solo 401(k)

If you’re a sole proprietor or in business with your spouse, a Solo 401(k) could be the right entrepreneur retirement plan for you. Essentially, you wear the hat of both employer and employee, and you can contribute in both capacities. The IRS explains how this work in detail, but for 2023, the contribution limit is a total of $66,000. If you’re 50 or older, you can also make a catch-up contribution of $6,500.

This is an attractive retirement plan option for an entrepreneur, particularly those over 50, because of the high annual contribution limits. Helpfully, you can also create a Roth version of a Solo 401(k), too. Additionally, you as the business owner can hire your spouse, and you can both contribute the maximums described above. You can see how this entrepreneur retirement plan option allows a couple to max out their tax-sheltered retirement savings. You can invest in any asset class, including publicly traded securities and alternative investments like real estate.

Note: If you have employees other than your spouse, you’ll have to open a standard 401(k) account, rather than a Solo 401(k).

6. Defined Benefit Plan

If you are an entrepreneur with an established business, no employees, and you’re a high earner, a defined benefit plan may work best for you. The contribution limit varies based on factors like age, income, and projected retirement age, but most people can contribute six figures to the plan each year – tax-free, too.

In essence, this retirement plan option allows an entrepreneur to create a pension for themselves. There is no Roth equivalent, so you’ll have to pay taxes on withdrawals in retirement. Note that a defined benefit plan comes with a large set-up fee, as well as annual maintenance fees. It generally only makes sense to utilize this retirement plan if you intend to make massive contributions year after year.

Which Entrepreneur Retirement Plan is Right for You?

As you can see, an entrepreneur has more flexibility and options when choosing a retirement plan. However, it’s important to choose the one that makes the best financial sense for your unique circumstances.

If you think you would benefit from a conversation about entrepreneur retirement plan options, contact Principal Preservation Services at our Wisconsin or Minnesota offices by emailing [email protected], or schedule a complimentary retirement review today.

Illuminated Advisors is the original creator of the content shared herein. I have been granted a license in perpetuity to publish this article on my website’s blog and share its contents on social media platforms. I have no right to distribute the articles, or any other content provided to me, or my Firm, by Illuminated Advisors in a printed or otherwise non-digital format. I am not permitted to use the content provided to me or my firm by Illuminated Advisors in videos, audio publications, or in books of any kind.

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