Pay Yourself First
Posted on January 30, 2016

As with any goal, you probably won’t attain it unless you make a plan with small steps. That’s how retirement planning works and as a small business owner, no one is going to do this for you!

Fortunately, there are many options and many qualified individuals to help you set them up! Today we’ll just cover the basics of a SEP IRA, SIMPLE IRA and individual 401(k).

If you are a sole proprietor and do not plan on hiring employees then a Simplified Employee Pension (SEP) IRA is definitely worth looking into. Opening one is easy with low annual account fees. Most banks, mutual fund sponsors or brokerage firms can help open one. As with all retirement accounts, SEP IRAs have a contribution limit which cannot exceed the lesser of 25% of your net income or $53,000 (for 2015 and 2016). The money you contribute is sheltered from taxes during the saving years. These plans are also useful if your income is higher then you expected; a SEP IRA contribution can help lower your tax bill. The opposite is also true, you can lower your contribution in years that income is not as high.

What if you currently are a sole proprietor but plan to one day hire some employees? Then you should consider a Savings Incentive Match Plan for Employees (SIMPLE) IRA. As the name suggests, you can continue to contribute once you hire employees. However, it’s called a “match plan” so you match up to 3% of your employees contributions. A SIMPLE IRA has lower contribution limits than other plans. The 2016 limit is the same as 2015; you can save up to $12,500 a year. If you are age 50 or over, you can make catch-up contributions limited to $3,000. As with most traditional IRAs, your contribution is tax deductible and your investment grows tax deferred until withdrawals are made. Fees for early withdrawal will be a 10% penalty (as with all tax-deferred retirement plans) plus regular income taxes on any early withdrawal that is not exempt.

If you want to save a significant portion of your earnings, a 401(k) may be the option for you. It has higher contribution levels at lower income levels then the SEP IRA. As the owner of your small business (one-participant plan) you can contribute elective deferrals and employer match (up to 20% of gross salary for self employed individuals). This means up to 100% of compensation up to the annual contribution limit of $53,000 for 2015 and 2016. Until the plan reaches $250,000, there is no required IRS filing. Another benefit? You can max out contributions in a good year and scale back in a lean year. Another way to max out contributions? Co-own your business with your spouse and both participate. This will shelter double the individual limit from taxes.

Standard 401(k) plans are attractive for prospective hires if you plan to expand your business. The set up cost generally runs from $3,000-$4,000 for the employer but the burden of saving is mostly put on the employee, due to the typical match system. An employee must contribute the 4% in order for the employer to contribute 4%. Employees typically like these plans because they can defer more of their own salary, (hopefully) have a match incentive, and many plans allow for loans in the event the employee has an emergency. If an employee takes a loan from their 401(k) they can pay it back through future payroll deductions.

This is just a general dialogue to get you thinking about retirement. Deciding on a retirement plan and how much you should save is best made through a discussion with your Certified Financial Planner (CFP). Tilia Fiduciary Partners is a knowledgeable firm that is able to recommend the best option to serve your interest. Walker Abney is a Principle Managing Director and available to answer your questions and assist in planning for your future. Check out their website at


Jordan Ilderton