The 3 Best Retirement Plan Options for S Corp Businesses

As an owner of an S corporation, choosing the right retirement plan can provide significant tax advantages and help you save for the future. Understanding the options available to you is crucial for making the best decision for your financial goals and business structure. Here, we’ll explore the 3 best retirement plan options for S corp businesses: the Solo 401k, SEP IRA, and Traditional 401k.

The 3 Best Retirement Plan Options for S Corp Businesses

Solo 401k

What is a Solo 401k?

A Solo 401k, also known as an Individual 401k, is designed for self-employed individuals and small business owners with no employees other than a spouse. This plan offers high contribution limits, flexibility in investment choices, and minimal costs.

Advantages:

1. High Contribution Limits: For 2024, you can contribute up to $23,000 as an employee, plus an additional $7,500 if you’re over 50. On the employer side, you can contribute up to 25% of your W-2 compensation, up to a combined limit of $69,000 or $76,500 if you’re over 50.
2. Tax Deductible Contributions: Contributions reduce your taxable income dollar for dollar, providing immediate tax benefits.
3. Roth Option: You can choose to make Roth contributions, which are made with after-tax dollars and grow tax-free.
4. Loan Provision: You can borrow from your Solo 401k, with certain restrictions.

Considerations:

• Administrative Requirements: Although relatively simple, a Solo 401k requires annual filings (Form 5500) if the plan’s assets exceed $250,000.
• Eligibility: Limited to business owners with no employees other than a spouse.

SEP IRA

What is a SEP IRA?

A Simplified Employee Pension (SEP) IRA is a retirement plan that allows employers to make contributions on behalf of their employees, including themselves. It’s an excellent choice for businesses with full-time employees.

Advantages:

1. Ease of Administration: SEPs are easy to set up and maintain, with minimal administrative paperwork.
2. Flexible Contributions: You can decide how much to contribute each year, up to 25% of your W-2 compensation or $69,000 for 2024.
3. Immediate Vesting: Employees are immediately vested in the plan, ensuring they have ownership of the contributions.
4. Tax Deductible Contributions: Contributions are tax-deductible for the business, lowering your taxable income.

Considerations:

• Employer Contributions Only: Only the employer can contribute, which can be a downside if employees want to make their own contributions.
• Equal Contributions: If you have employees, you must contribute the same percentage of salary for each eligible employee. If a business owner wants to contribute a lot for themselves, but minimally for their employees, this would not be the best option.

Traditional 401k

What is a Traditional 401k?

A Traditional 401k is a retirement savings plan sponsored by an employer. It allows employees to save and invest a portion of their paycheck before taxes are taken out. Employers can also make contributions to the plan.

Advantages:

1. High Contribution Limits: Employees can contribute up to $23,000 in 2024, with an additional $7,500 catch-up contribution for those over 50. Employers can match contributions, making the total potential contribution up to $69,000 or $76,500 if you’re over 50.
2. Employee Contributions: Employees can contribute to their retirement savings, often through payroll deductions.
3. Tax Advantages: For employees, contributions are made pre-tax, reducing taxable income. Investment growth is tax-deferred until withdrawal. For employers, contributions to the plan are tax deductible.
4. Flexibility: Employers can choose to offer Roth 401k options, providing tax-free growth.

Considerations:

• Administrative Complexity: Traditional 401ks require more administrative oversight and compliance with ERISA regulations, including annual testing and Form 5500 filings.
• Costs: They can be more expensive to maintain due to administrative and compliance costs.

Which of the 3 Best Retirement Plan Options for S Corp Businesses is Right for Your Business?

Selecting the best retirement plan for your S corp depends on various factors, including the size of your business, number of current and future employees, and your retirement goals.

• Solo 401k is ideal if you are a sole proprietor or have no employees other than your spouse, offering high contribution limits, flexibility, and minimal costs.
• SEP IRA works well for businesses with employees but don’t want to pay the higher costs to administer a traditional 401k plan.
• Traditional 401k suits businesses with multiple employees, providing both employer and employee contributions with significant tax benefits. Traditional 401k plans currently offer tax credits to help offset costs.

By evaluating these options and considering your specific business needs, you can create a robust retirement strategy that aligns with your financial objectives. If you would like a referral to set up and/or manage one of the retirement plan options for an S corp, I am happy to provide a referral, just Click Here.

For personalized advice and assistance in determining whether an S corp is the right choice for your business, contact S Corp Advantages. Our team of experts specialize in helping businesses optimize their tax strategies and navigate the complexities of S corps. Feel free to reach out if you have any questions or need further assistance with your S corporation tax strategies.