Three retirement savings plans business owners and self-employed people can use to get tax advantages and financially prepare for the future.

Retirement planning often falls into the important-but-not-urgent category for most small business owners. When it comes to creating a plan to fund your retirement, like other non-urgent tasks, it’s easy to convince yourself you’ll do it later. However, the sooner you start saving, the more likely it is you’ll be able to live comfortably after you stop working. Let’s take a look at some of the most commonly used plans.

Three retirement plans for sole proprietors and the self-employed

A traditional individual retirement account (IRA) is one of the simplest ways to save for retirement—and reduce your taxable income. You decide how much you put in each year, up to certain limits.

You could also fund a Roth IRA using money you’ve already paid taxes on. The biggest benefit of a Roth IRA is that earnings and withdrawals aren’t taxed.

In 2022, total IRA deductible contributions are limited to $6,000 per year ($7,000 if you’re older than 50). However, you can’t contribute more than your taxable compensation for the year. If you contribute more than the legal limit, a 6% excise tax will be charged.

If you’re married and your spouse doesn’t earn income you can contribute to a spousal IRA.

A third option is a simplified employee pension plan (SEP). SEPs are designed for businesses with one or more employees, and an account is set up for each eligible employee. Employer contributions must be the same percentage of salary for all employees, including the business owner. For example, if you set aside 7% of your salary in SEP IRA, the business would also be required to contribute 7% of each eligible employee’s salary in a SEP IRA account. For 2022, the maximum contribution to a SEP IRA is the lesser of $61,000 or 25% of employee compensation.

Calculate SEP IRA contributions carefully. Employers or self-employed people who make SEP IRA contributions that exceed the legal limits may be subject to a 10% excise tax. Additionally, the employee’s excess SEP IRA contributions may be subject to a 6% excise tax.

Get expert advise

It’s wise to work with an accountant or tax advisor to make sure your contributions are within the legal limits and to help you maximize your savings.

Consumers offers traditional IRAs and Roth IRAs that can help you reach your financial goals whether you’re just starting out or plan to retire soon.

Do you have business banking questions? Contact our knowledgeable commercial loan officers online or call 800-991-2221. We’re also available to help in person at your local Consumers office.