There are 31.7 million small businesses in the US. This leads us to believe that there are just as many business owners, too. Because companies are the ones usually providing 401(k) and other retirement options, what do those small business owners do? Who sets up their retirement account for them?

This is a great question and one that plagues many small business owners. After all, it's incredibly important to start investing in your own retirement options as early as possible to enjoy the effects of compound interest. However, small business owners also have a lot of other things to worry about. Finding the time and resources for managing their company's 401(k) plan or setting up an IRA can quickly become lower on their priority list.

So, we’ve created this helpful retirement guide to help you understand what your options are. Follow along as we compare small business 401(k)s to other retirement plans. 

Already know that you’re interested in simple, affordable retirement plans for SMB owners? Check out our managed IRA plans, which start out at just $49/month plus $8/employee.

What is a 401(k)?

A 401(k) is one of the most popular retirement account options. It's a tax-deferred way of investing for retirement, really. And, it's often referred to as an employer-sponsored plan because most businesses offer these types of plans to their employees.

How do you invest in a 401(k)? You put money in before taxes are taken out, it accumulates over time thanks to compound interest, and your total balance will grow without being taxed each year. Since you’re investing pre-tax income, it reduces your taxable income for the year. You save for your retirement and pay less taxes.

401(k)s do have contribution limits, though. In 2021, you can contribute a maximum of $19,500. If you’re over 50, you can contribute an additional $6,500. Can a business owner have a 401(k)? Yes! However, it’s called a solo 401(k) in that case.

Solo 401(k)s are a great option for business owners! They don't let you contribute if your company has employees, but it's possible to use this plan and still cover both yourself and your spouse. The best part about this retirement option is that, as a solo business owner, the only requirement you have to meet is just that: that you be a solo business owner! There are no age or income requirements.

As long as you have an employer identification number, you can open a solo 401(k) with most online brokers. So, you don’t necessarily have to worry about any complexities that might be involved with setting the account up.

Want to learn more about the alternatives to a small business 401(k)? Check out our managed IRA plans, which start out at just $49/month plus $8/employee.

401(k) vs. IRA

The other most popular retirement option is an IRA, or an Individual Retirement Account. And, a lot of people don't realize that both IRA and 401(k) accounts grow tax-free, meaning you pay no taxes on the interest or earnings over time. 

Withdrawals from these plans typically get taxed at your current income rate in retirement, but not always! There are IRAs which allow you to withdraw funds penalty free if you're 59½ years old or older; otherwise it'll incur a hefty IRS fee (which could really add up).

Overall, IRAs generally offer more investment choices than 401(k)s, but contribution levels are much lower, so you can’t enjoy the tax-free growth as much as you can with a 401(k). That being said, though, it really depends on the type of IRA you have that will dictate how lucrative it can be for you in the long run.

If you’re self-employed or a solo business owner, want to save alongside a 401(k) plan, want access to a wider selection of investment alternatives, or are expecting to be in a much higher tax bracket when you retire, setting up a Roth IRA account is a great option for you. However, it’s not your only option...

What’s the Best Retirement Option for a Small Business Owner?

Aside from a 401(k) or a regular IRA, what are the other options available to small business owners? One of the most popular alternatives is a SEP IRA. Let’s break down what a SEP IRA is and whether or not it’s a good option for small business owners.

SEP IRAs for Small Business Owners

SEP stands for Simplified Employee Pension. A SEP IRA is a type of Individual Retirement Account (hence the name IRA), that allows individuals like you to set aside up to 25% of their income for retirement before taxes are taken out.

SEP IRAs were designed by the government to encourage small business owners and self-employed workers to save for their retirement without incurring large fees and other expenses. These types of accounts allow the funds to grow tax-deferred until they are withdrawn, making them a very attractive vehicle for retirement savings.

However, do keep in mind that this does mean that you’ll be taxed at whatever tax rate you’re currently at when you reach retirement. Keep that in mind if you plan on scaling quite a bit in your business or solo career.

The tax deferment is perhaps one of the biggest benefits. And, that doesn't just for a SEP IRA but for other types of retirement accounts as well. Likewise, when you’re contributing to a retirement account, you’re benefiting from compound interest. Read more on that here.

Professionally-Managed IRA Plans for SMB Owners

Small business 401(k)s and SEP IRAs are great, sure. But what you’re really looking for is a managed IRA plan that is being personally managed by an expert investment professional.

If you want to offer your employees great retirement solutions while also ensuring that the accounts they’re investing in are going to actually grow long-term and help them build wealth, try the Wealth Stack Retirement Pack.

Wealth Stack has plenty of tools at your disposal, including providing access to financial counselors who will walk alongside you and your workers as they educate themselves about all aspects necessary when investing in their retirement portfolios. And, Wealth Stack retirement accounts are managed by an expert investor and former hedge fund manager.

With a library of over 100 videos and articles on everything from investing to retirement planning and personal finance tips, we’re your one-stop-shop for all financial-related questions. Welcome to your path to financial freedom.

Click here to learn more about the Wealth Stack Retirement Pack and to schedule your free consultation with a professional today.