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If you're a small business owner, freelancer, or self-employed professional, one of the smartest moves that you can do outside of growing your business is...
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If you're a small business owner, freelancer, or self-employed professional, one of the smartest moves that you can do outside of growing your business is setting up a retirement plan. But there's so many acronyms and names out there. Heard of SE IRA, simple IRA, sol 401k. What do they mean? How do you know which one is right for you?
Well, in this video, we'll break down the most common retirement options for business owners, including how much you can contribute, what are the tax benefits, and which which plan is best suited for. So, let's dive in. Hi, my name is Prince Chenou. I work at a big financial institution, and I come create these videos to make all things personal finance simple, practical, and accessible for everyday people like yourself.
So, why does a business owner even need a retirement plan? But when you're self-employed, there's no company 401k, no match from HR, or no one saving for your future except yourself. But the good news is you have the access to powerful tools the W2 employees don't. And whether you're a solo freelancer or having a small team, there's a retirement plan that fits.
So now I want to first take start talking about solo 401k. If you're a self-employed with no full-time employees other than possibly your spouse, this is hands down one of the most powerful retirement plans available to you. It offers unmatched flexibility, high contribution limits, and a unique future that helps you build serious wealth for retirement.
One of the key biggest advantages of a 1K is that you can contribute to the plan in two different ways, both as the employee and the employer. This dual role allows you to put away significantly more money each year compared to other retirement plans, which also significantly reduce your taxable income on both the personal and the business side.
As an employee, you can contribute up to $23,000 in 2025. And if you're age 50 or older, you're eligible to additional catchup contribution, bringing the totals of 30,500. And on top of that, you can make an employer contribution up to 25% of the net self employee income. And when you combine the employee and the employer contribution, your total annual contribution can reach up to 69,000 or 70 76,500 if you're over 50.
Another powerful feature of a solo 41k is that it allows you to make Roth contributions. This means that you can pay taxes on your contributions now and enjoy tax-free withdrawals in retirement. Plus, the plan also permits loans, allowing you to borrow from the account if needed, which is a level of flexibility you won't find with a SE or simple IRA.
However, keep in mind though, if your sol 401k assets grow beyond $250,000, you will be required to file 45500 EZ with the IRS each year to report your plan activities. This plan is best for highincome solo entrepreneurs or small business owners without full-time employee employees who want to maximize the ability to contribute for retirement savings, reduce tax burdens, and retain control over how and when they make contributions.
While the solo 401k is extremely powerful, it does come with a little bit more complexity and it does require a formal setup and depending on the size of the assets may require annual IRS filings. But for business owners who want higher contribution limits, the ability to grow to borrow, and access to Roth options, this is a small trade-off for a big payoff.
Now, let's move to a SE IRA, which stands for simplified employee pension. This is one of the most straightforward and hassle-free retirement plans you can set up as a small business owner or a self-employed professional. It is designed to be simple to administer but don't let the simplicity fool you as this plan allows for large contribution limits making a powerful tool for building retirement savings.
One of the key characteristics of a SE IRA is that only the employer can make contributions. See now this is the difference from a solo 401k where both the employer and the employee can make contributions. So that means that as a business owner you don't have the option to defer part of your salary like you can with the solo 401k.
The contribution limits is interesting though. You can contribute up to 25% of your compensation with the max cap of $69,000 2025. This makes the SER especially appealing for high income business owners who want to reduce their business taxable income and build up their personal retirement saving at the same time. The contribution that you make are fully taxdeductible which means that they directly lower your business taxable income for the year.
Another major benefit is that the SE IRA has no annual final requirements. You don't need to submit any special forms to the IRS each year, which makes it very easy to maintain and manage. And finally, the SE IRS is flexible in terms of eligibility. It works well for both solo business owners and business with employees.
However, there is one important caveat to understand. If you have employees who meet eligibility requirements, which are that you must be 20 age 211 or older, have worked for you in the last three out of the five years, have received at least $750 in compensation, you are required to contribute the same percentage of their salaries that you are contributing for yourself.
For example, if you put away 25% of your own income, you must contribute 25% for each eligible employee. And depending on how many employees you have, that obligation can quickly add up and become quite costly. So with that in mind, the SER is best suited for freelancers, solo entrepreneurs, or profitable small businesses that either don't have full-time employees or staff only have a handful of employees.
Especially attractive for owners who want high contribution limits without the paperwork or the complexity of a 401k. If you're earning good money and want to keep things simple while still lowering your taxable income, the plan is definitely worth considering. Now, what if you're a small business owners with employees and you're looking for a retirement plan that not only is easy to set up, but also affordable to maintain all while giving your team a solid way to save for the f for their future.
That's where a simple IRA comes into play. Simple stands for savings incentive match plan for employees. It's a straightforward plan that helps you offer retirement benefits without getting bogged down by the complicated rules, hefty administration costs, or overwhelming compliance paperwork. The simple IRA is available exclusively to businesses with a 100 or or fewer employees, making it popular and practical choice for small companies.
This allowed these businesses to stay competitive in attracting and retaining talent by offering a value retirement benefit without the burden of complex plans designed for large firms. Just like a 401k, employees have the ability to make salary deferral contributions, which means that they can choose to contribute a portion of their pay directly into the plan before taxes are taken out.
For 2025, the limit for employee contribution is $16,000. And if the employee is 50 or older, there's a catch-up contribution option that allows them to contribute an additional $3,500 raising their total possible contribution to 19,500. Employers have the have a requirement too. They must contribute to their employee account as well. They have two options of how the employer can do this.
One, matching contribution. The employer can choose to match the employee contribution dollar for dollar up to 3% of the employee salary. For example, if the employee makes a $500,000 a year and decides to contribute 3% of their salary, which is be $1,500, the employer can match up $1,500 contribution. However, the employee contributes less than 3%, let's say 2%, which would be $1,000.
Then the employer only matches up to that $1,000. This matching approach encourages employees to save because they're pretty much getting free money from the employer up to the 3% limit. Two, non-elective contributions. Alternatively, the employer can con can decide to contribute a flat 2% to every eligible employee salary. whether or not the employee actually contributes anything.
For instance, if the employee earns $50,000 annually, the employer will contribute 2% of the salary, which would be $1,000 directly to the simple IRA account. This happens even if the employee chooses not to put any of their own money into the plan. This method guarantees the retirement contribution for all eligible employees, making it a predictable and consistent cost for the employer.
One of the biggest advantages of a simple IRA is the low MA administration burden. Unlike a traditional 401k plan, simple IRA does not require any IRS filings like the form the 500, nor does it have complex non-discrimination testing. Setting up the plan is typically straightforward and less costly with minimal paperwork. The simple IRA is the best suited for small business owners who want to offer the employees a meaningful way to save for retirement but without the complexity time commitment or the high cost that comes with a traditional 401k plan.
While a simple IRA has many benefits, it does come with some limitations. The contribution limit for employee deferrals are lower than the available throughout other business um business small business retirement plans like the sole form or the SE IRA. This means that high earning employees who want to maximize the tax advantage savings might find the simple IRA restrictive.
Another important point is the mandatory employer contribution. With the simple IRA, employers must contribute each year. This means that business owners should plan for the fixed cost as part of their budget, especially if their employee account grows because the cost will increase accordingly. Additionally, simple have a two-year rule for withdrawals. If the employee withdraws funds within the first two years of participation, the early withdrawal penalty increases from usual 10% to 25%.
This rule encourages participants to use the plan primarily for retirement savings and discourage early tapping of funds. If you're a small business owner looking for a hassle-free way to help your employees save for retirement, the Simple IRA could be a just the right fit. Now, looking at all these plans on the screen, there's many different plans with different purposes.
For example, if you're a business owner with a team less than a 100 employees, a simple IRA may make sense for you. Or if you're self-employed and have no employees, then the solo 41k will make more sense. The truth is, there's only one there's no one fit all. The right plan depends on your income, your team, and how much you want to save.
But starting something is far better than nothing. The earlier you begin, the more power compound growth has on your side. Now, if this video helped, please like, comment, and subscribe. Drop a comment and reach out. I would love to be able to start a conversation going and would love to be able to help answer any questions you may have.
Thank you, and have a blessed day.
This video is for general educational purposes only and is not personalized investment, tax, or legal advice. Every situation is different. Talk with a qualified professional about your circumstances before acting. PLC Wealth Partners is a registered investment adviser. See our disclosures.
