May 30, 2024

How to choose a small business retirement plan in 2023



Published May 17, 2023, 2:20 a.m. by Naomi Charles


As 2023 approaches, many small business owners will be looking to retire. The question then becomes, what is the best retirement plan for a small business owner? There are many different options out there, so it can be tough to know where to start.

One option is to simply sell the business. This can be a good option if the business is doing well and you have a buyer lined up. It can also be a good option if you don't want to deal with the hassle of running a business anymore.

Another option is to close the business down. This is usually only an option if the business is not doing well. It can be a hard decision to make, but sometimes it is the best thing to do.

A third option is to keep the business running but hire someone else to run it. This can be a good option if you are not ready to retire yet but still want to have some income coming in. It can also be a good option if you are not sure what you want to do with the business after you retire.

No matter what option you choose, make sure you do your research and talk to a financial advisor to find the best plan for you.

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today we're going to talk about the

small business retirement plans for 2023

and we're not just going to talk about

all the different plans but how do you

use them together so I'm going to talk

about the traditional IRAs the Roth IRA

sep simples and solo 401ks that's

basically what we're going to be talking

about today and if you also have a

workplace plan like a 401k or a 403 b

they're going to be on this guide that

I'm going to go through so you can also

see how you can use those together and

I'll talk a little about that as well so

let me go ahead and pull this up on the

screen let's jump right into this so

this is going to be the PDF guide that

we're going to go through

and you can get it on our Discord server

and I'll show you what that what that

looks like if you're not familiar and uh

as we go through the video but I'm going

to go through the the traditional IRA

and the Roth array first so you can see

how those work the seps the samples and

you can see here on the chart we also

have money per money purchase plans and

profit sharing I'm going to talk about

the profit sharing size of the

retirement plans not just Standalone

plans and then we're going to talk about

uh you can see the 403b right there Roth

403b and also the 401K the Safe Harbor

401K I'll explain quickly what those are

and then of course the solo 401K also

known here is written as the individual

K and the Roth side the Roth individual

okay but I usually just refer to it as

the solo 401K so let's go ahead and

start with this uh right at the very top

and looking at the traditional and the

Roth IRAs now with the traditional and

the Roth IRAs this this should be used

in conjunction with your small business

retirement plans so that should be how

you think of things and you're going to

see that it's more difficult to use

these two types of accounts when you

have certain plans like the SEP IRA so

let's start with the traditional and the

Roth IRAs if you're not familiar with

them you can save up to sixty five

hundred dollars in 2023 and it says it

right here

and I'll use our Arrow to show you for

2023 that's going up to sixty five

hundred dollars for the traditional Roth

IRA spousal that simply means if your

spouse does not have earned income

themselves but you do then you can

consider that earned income when you're

making a contribution for your spouse

and then the guardian is if you have a

dependent or minor children and you have

any of these types of IRAs traditional

or Roth in their name they're just

saying that it's considered a guardian

account that's similar to a utma account

if you have a child or a minor they'll

have the basically their investment

account it'll be utma account it's the

same type of account as a regular

investment account so that's what the

guardian means there so sixty five

hundred dollars in 2023 and if you

haven't filed your taxes yet uh you can

still put in six thousand for twenty

twenty two up until your tax filing

deadline so it's going up by five

hundred dollars now the catch-up

contribution is for if you're 50 or

older so in the year that you're going

to turn 50 you can actually put in the

additional 1000 you don't have to

actually be 50 years old but in the year

that you're turning 50 that tax year you

can put an additional 1 000 that means

you can put a total of 7 500 for 2023 so

that's what that's showing right there

so when you're looking at these these

two types of accounts the traditional

and the Roth they aggregate so that

means you can split it up any way that

you want but you can't go over the total

limit of sixty five hundred dollars so

you could not put 6500 into the

traditional IRA and sixty five hundred

dollars into the Roth however you break

it up it has to equal a maximum of sixty

five hundred dollars if you're under the

age of 50. now if you are doing a

backdoor Roth that is a non-deductible

contribution and then you're going to

convert over anything that you convert

doesn't count that's just a conversion

it's basically uh like a rollover you're

rolling it over from one account to the

next that is not a contribution that is

a rollover or in this case a conversion

so that does not count towards that

limit it's a question I get asked every

now and again so it's just the new money

think of it just the new money going

into any retirement plan that is going

to be the contribution you can do as

much conversions as you want if you want

to do the full amount if you want to do

more than

um than just the 6 500 you can convert

as much as you want which will not

affect the amount of your contribution

so it's just contributions now these two

plans when you're thinking about these

should stand alone from your other

retirement plans if you're really trying

to save as much as you can and when

you're you're when you're putting the

money into these types of plans you just

have to know can you put it into the

traditional IRA can you put it into the

Roth IRA and we have that down here

so if we first look at your modified

adjusted gross income to figure this out

for your Roth IRAs can you make that

Roth contribution if you're a single

filer that phase out begins at 138 000

for modified adjusted gross income

most of the time or a lot of the times

your modified adjusted gross income is

simply your adjusted gross income the

modified portion is if you add to have

to add certain things back

from 138 to 153 000 is the phase out so

if you are have a modified adjuster

gross income that's below 138 138 000

you can put the full 6500 directly into

your Roth IRA from Air filing jointly

then it is 218 000 to 228. it's based on

your filing status so if your modified

adjuster gross income is 218 and you're

married filing jointly then you can make

that full contribution is not based on

your income it's your filing statuses

income so that's really important that

you understand that so if you are

earning less than 200 that 218 000 but

your spouse is earning

what would put you over that limit then

in fact you are over that limit so

that's how that works now if we go down

here I think there's another part here

that'll show us

um the IRAs so here we go so the IRA

limits to make these contributions if

you have a workplace plan so if you have

a workplace plan these numbers will

apply otherwise you can make a

contribution to your traditional IRA at

any income limit but if you have a

workplace plan then there are limits so

if you're modified adjusted gross income

is seventy three thousand dollars or

less you can see that right here 73 000

or less then you can make the full

deduction now what does that mean a full

deduction is what I was just talking

about making that back door Roth that is

a non-deductible contribution in this

case it would be a deductible

contribution so that would reduce your

taxable income that is the way to think

of it so let's say you're earning a

hundred thousand dollars and you put in

one thousand dollars into your

traditional IRA as a deductible

contribution that means your taxable

income then is 99 000. so it will fall

by the amount that you make the

contribution if it were a non-deductible

contribution let's say you put that one

thousand dollars into your traditional

IRA as a non-deductible contribution and

your adjusted gross income was a hundred

thousand dollars it would still be a

hundred thousand dollars so that's how

that works now as far as the

self-employment tax goes get this

question kind of confuses a lot of

people what about the self-employment

tax that gets taxed no matter what so if

you have your small business and you're

paying that self-employment tax whether

or not you put it pre-tax into any of

these accounts any of them whether it's

the traditional IRA

or your solo 401k or your sep or your

rothsite it does not matter it you're

still going to have your self-employment

tax this is only for your federal income

taxes that will that was the only thing

that's going to be affected here so you

will still have your self-employment tax

so here we go with modified adjuster

gross income so that goes up to a

hundred and sixteen thousand it says 160

000 or less is fully deductible and then

there's a phase out from 116 to 136 and

I I didn't say that up here but for

singles it there's a phase out of from

73 to 83 000. and then over that you

will have to do the um a non-deductible

contribution and usually when you're

doing these non-deductible contributions

you're going to end up doing the

backdoor Roth the reason being is it's

not wrong to do a non-deductible

contribution and leave it in your

traditional IRA but if you don't have to

deal with that and you can just roll it

over to the Roth you're going to likely

be better off because any of the growth

then will if it's in the Roth IRA will

then come out tax-free but if it stays

in that traditional side that growth

part to the non-deductible contribution

will then come out as ordinary income so

it's really in your best interest to get

it over to the Roth but it's not wrong

there are scenarios where I prefer to

keep it in the traditional side as a

non-deductible contribution but that's

just something to consider and you're

going to see that as we go through these

plans as we tie them all together

so let's go back up to the top and we'll

start with the sep now I like the sep

sometimes and with the secureac 2.0

we're going to have the Roth side to it

and in fact let me um let me see when

that date goes into effect I have the

securac cheat sheet here I haven't

memorized that yet

um December 31st 2022. so we're already

in that so 2023 you can have it Rockside

to your SEP IRA and make those

contributions but just because it has a

raw side to the set does it mean I would

lean towards the SEP IRA just because oh

well now I have my traditional side and

my raw side and it's a pretty simple

plan to open up versus other types of

plans

I'll use this one well I wouldn't do

that

um the reason being is because when

you're putting the money into the

traditional IRA let's say as a

non-deductible contribution and you want

to do that backdoor Roth conversion

you're going to get stuck in the Pro

router roll and the pro rata rule says

that I'm going to actually draw it out

here for you it says that if we have our

traditional IRA here

t-i-r-a and we make a non-deductible

contribution

non-deductible contribution

then and we want to do this conversion

over here to the Roth side so that's

what I was just talking about right so

you know what let's just put it as a

non-deductible contribution because I

earn too much we'll put it into the

traditional IRA and then we'll

immediately convert it over

non-deductible contribution into your

traditional IRA there is no such thing a

lot of people get confused by this there

is no such thing as a non-deductible IRA

it is a non-deductible contribution

going into your traditional IRA now I

don't care if you have 17 traditional

IRAs it doesn't matter they all get

roped into the pro router calculation so

you can't say oh well I didn't I only

had non-deductible contributions to this

traditional IRA that doesn't matter it

ropes in all your IRAs including the SEP

IRA so if you're making contributions to

the sep then guess what all that pre-tax

traditional money is going to get roped

into this proirata role and it's not the

fact that you are going to pay taxes on

your conversion but when you're making

that 6 500 or whatever contribution into

non-deductible contribution into your

traditional IRA and you can only do a

portion to it well that full amount

let's say we put in sixty five hundred

dollars and let's say that we wanted to

convert the 6500 but we had some money

that was pre-taxed into either of these

two accounts then only a portion of this

is actually going to get converted so

you're still stuck with that

non-deductible contribution and then you

have to rely on your 8606 so you're

gonna look at your 80 606 which is your

tax form to help you track which is

non-deductible versus pre-tax and in

doing so you're basically going to be

stuck into this Pro router role for all

eternity until you fix it you know it's

not like it's broken but until you

basically get all that pre-tax money out

of here so until you do that you're

going to be stuck with the pro router

roll when you're doing those conversions

so that is why I wouldn't necessarily

jump to the set by array saying oh now

they have the set by array on the raw

side so Best of Both Worlds great we're

done and that's it right no what I would

lean towards if I had the opportunity is

the solo 401k and we're going to get to

that so let me go ahead and scroll down

here

and we're going to go take a look at

that really quickly so we get we're

going to skip this simple for just a

second so we're going to look at the

solo 401k or the individual okay that is

not included in the Pro router rule that

alone makes it a in my opinion a much

better plan than the sep but if we're

looking at these two plans the solo 401K

you can only use it if you don't have

any full-time eligible employees where

the sap you have to you can't have

employees but a negative of that is

going to be the fact that you're going

to have to put in whatever percentage

you contribute into your employees as

well so let me see if it actually

outlines it right here so it's saying 25

up to 25 of compensation up to sixty six

thousand sixty six thousand is going to

be for 2023 and really quickly these

plans you're going to see these numbers

over and over again

um right right here

so we can see it right here 100 of

compensation or up to 66 it should say

or up to or up to sixty six thousand

dollars for 2023. if you're still in

2022 100 of compensation up to 61 000.

so that is the maximum that you can put

in and that's up to 25 percent

approximately 20 for sole Proprietors it

works out it is 25 for sole Proprietors

but there's this funky math because of

net profit what is what it's based on

but then it's deductible is one half of

your self-employment it's a formula

thing but it's still 25 so don't think

that you're you're giving your employees

25 when you're only really allowed 20

it's still 25 just the way the math

works out so it's 25 of your

compensation

if you're an S corp really simple it's

25 of your W-2 that's it so if you pay

yourself a W-2 and your S corporation

then you can make a contribution to your

sip otherwise you can't but if you are a

sole proprietor Schedule C filer then it

is going to be a little bit of a math

equation to get to it but you're going

to basically do 20 percent

of your plan compensation it is not your

net profit is your plan compensation so

that's the same amount for all employees

that are eligible for the plan so you

can't pay yourself you can't contribute

more to your plan and decide that you're

not going to give it to your employees

it has to be the same across the board

so when does it make sense to use a sep

in that kind of an instance if you have

close family members that you actually

want to make a huge contribution to to

their plan just as much as you would

your own plan and that's really the idea

you're not going to open up these plants

and just contribute like one or two

percent you really want to pack these

things most people I find go right to

the max what's the most I can put into

this plan let's open it up and let's

fund it and if you do have those

employees that you do want to actually

make those types of contributions just

be aware that it's required so that is a

a part or feature or benefit of the SEP

IRA

and you can see the eligibility right

here it's age 21 or older worked three

of the last five years and earned at

least 650 in each of those years and may

exclude Union employees and non-resident

aliens so if they don't meet those

requirements then they're technically

not eligible and if those are the only

employees that you have and they're not

eligible then by all means the set by

rate might be a good plan for you to use

where you can put in that amount but

again I could I could still find ways to

get more money into the solo 401k and

we'll get to that in a second so I still

like the solo 401K in almost every every

aspect better than the sep

but the fact that if you do have

eligible employees for the retirement

plan then it eliminates that solo 401K

so maybe you're only left with the set

by array

vesting is 100 meaning that your

employees could take the money from the

retirement plan and move it to their own

plan if they are no longer employed

there there's no vesting schedule you

see vesting schedules in workplace plans

but not for small these small these

types of small business plans they don't

have them for the SEP IRA so that's how

you can kind of use them together and

you can use the SEP with your

traditional and your Roth IRAs so if we

go back up to these plan limits and I

think a lot of this stuff just gets

confusing for people like what what is

the most that you can actually put into

these plans you can put in sixty six

thousand plus sixty five hundred dollars

into your traditional new Roth so do

your traditional and Roth split up

however you can or want 6 500 and then

do an additional 66 000 into that plan

they're also called 415 limits but

that's how you do it right there if you

Google this you'll see some IRS some

guidelines on those numbers for the 415

limits but that's what it's referring to

this is the most

that you can put in so if we scroll down

a little bit we can move on to the next

plan and we can look at the simple IRA

now if I have employees and I wanted to

contribute

to their plans I might actually lean

towards this simple IRA so if I had

eligible employees this is probably

going to be a little bit easier plan to

deal with than the sep just because

you could in some instances get more

money into your own plan and if they

don't really want to contribute then you

don't really have to worry about it so

if you look down here the contribution

limits and requirements

are right here so the employees can

defer up to fifteen thousand five

hundred dollars for 2023 uh 19 050 or

older so that's including the catch-up

contribution so let's scroll up really

quickly again on this cheat sheet and

again I'm going to let you download this

on our Discord server so you can see the

simple plans right here 15 5 plus the

catch-up limit of 3 500 that's if you're

50 or older and that is the most now by

the way if you're

making a lot a lot of money so if you're

over these limits right here this 415

um limit of 265. this is the most

planned compensation that you can

include in your calculation now if you

do the math and some of these plans

you're going to hit these limits just by

doing the math but 265 is the most that

you can do the simple IRA could be one

of those plans that if you're earning

this amount I think the math would work

out that you might not Max it out at

either two or three percent depending on

how you're doing it what am I talking

about let's go back to that so let's

take a look at the simple here you have

a choice when you're setting up this

plan

and that choice is right here so the

employer must match dollar for dollar up

to three percent of compensation or two

percent of compensation as a

non-elective contribution a non-elective

contribution means that you can do a

lesser amount which is just two percent

but you're going to give every eligible

employee two percent of their

compensation even if they don't

contribute to their own plan so if they

don't make a contribution then you would

still have to give them two percent you

could think of that part as the batch

but they don't have to actually

contribute anything to get that match

that is what non-elective um a

non-elective contribution is or you can

do the three percent I think the three

percent is a better deal and it makes

more sense to me why have a retirement

plan it's an incentive to get your

employees to save for their own

retirement and give them a little bit of

a boost of a benefit for your

compensation package that's basically

what it is but if they're not

contributing let's say they're just not

interested in it they don't really value

it

you're still forced to do the two

percent if that's what you chose as a

non-elective so three percent elective

meaning they have to put three percent

and then you will match them with three

percent or on the other side you're

gonna give them two percent no matter

what again I like that three percent

match because it says hey if if they

take their retirement seriously then so

will I and that's basically the way I

look at it so

that is your choice when you're dealing

with the simple uh the simple IRA and

you can see right here it says that you

can you can lower it to one percent for

two years of every five years I don't

know if I've ever actually seen that I'm

sure there are plans out there that do

that but I guess if you fall on Hard

Times you can do that your employees

much won't much appreciate that but you

have that flexibility there but again I

haven't seen that on a plan I don't

think ever

um and I don't know if I've ever even

heard of anyone actually do it but I'm

sure somebody will leave a comment at

some point at their simple IRA was

um reduced

so let's see what else we got here so

the vesting is still 100 so if if you

make that two percent and they quit the

next day it's their two percent

it's basically the way that you would

look at it with all the retirement plans

on the distributions that it's after age

59 and a half that's pretty much a given

on the retirement plans that we're

dealing with and there are no loan

features to this plan either and there

are no loan features on any of the plans

for the small businesses that we're

going to really focus on on this channel

and you can see them right here the

workplace type of plans that you're

going to see over here and there are

small businesses that will have these

type of plans a profit sharing or money

purchase plans but they're going to be

much fewer and far farther between and

then you can see here probably the 401K

has it too and the uh Safe Harbor 401K

is going to have that loan feature

oh and that's right you can have a uh a

loan feature on your solo 401K but

you're going to need custom plan

documents on that so if you're watching

one of my solo 401K videos I do touch on

that briefly that to have custom planned

documents to do all of the features that

the solo 401K can actually do so that is

uh what you would want to look out for

I'm going to go ahead and skip over

these two plans right here you can see

kind of the benefits and I'm going to

talk broadly about workplace plans in

conjunction with your small business

plans and I'm going to show you how to

get a little bit more into these plans

and you might might have originally

thought or why you should have a small

business plan even if you have a

workplace plan

so here the 401K the Roth 401k that's

your your regular what you would think

is your regular 401k

and then over here we have our Safe

Harbor Provisions the only real

difference in these plans is that they

don't have the same testing if you have

this amount but then there's going to be

a contribution amount that you're going

to have to meet in order to to have

these plans but that's basically the

difference between

um a regular 401k and a safe harbor 401K

is you're going to be able to avoid some

of the testing if you have some of these

plans and it's also 100 for both

investing is 100 for both employees and

employer contributions that's part of

the Safe Harbor

um because there could be a vesting

schedule

um let's see investing 100 for employee

contributions investing scheduled

allowed for employer contributions so

that's what you're going to have there

that is basically wherever there's a

give me there's a gotcha on the Safe

Harbor provision that you're going to

have to make this contribution and it's

there's day one rather than saying that

there's a vesting schedule to it then

with the solo 401K the solo 401K again

is is by far in my opinion one of the

best plans you can get but you're likely

going to want the custom plan documents

and the reason is is that there's

prototype plans and then there's going

to be the custom plan documents in a

nutshell

the Prototype plans don't allow you to

do things like the mega backdoor raw

strategy so if you're familiar with a

backdoor Roth you can do the same

concept or the same strategy in your

solo 401K but in order to do it your

plan has to allow for it and a lot of

the broker dealers I don't think any of

them I think all of them go with the

Prototype plans reason being is because

they are not responsible for the

reporting requirements when you're doing

those transactions so if you do your own

custom plan documents that kind of falls

on your shoulders but in my opinion as

long as you know what to do it's pretty

simple and it's well worth it so you can

get a lot more money into your

retirement plan and do that backdoor

strategy to get more into the Roth side

so let's talk a little about how you can

get more into the solo 401K versus the

sep and then you're going to see why

that combination makes a lot more sense

so I'm going to bring this right back up

here so we have our step over here but

the reason I would go with this solo is

because if we're making say a a hundred

thousand dollars then quite simply if

we're an S corporation it's going to be

25 of this amount 100 000 as a W-2

employee of your own company you can

only put in twenty five twenty five

thousand dollars into the sep if it's a

Schedule C filer you're gonna do a

little bit of math but it's gonna work

out to twenty percent into the sep

that's it there's no employee side that

is what you're missing on the solo 401K

you can do the exact same math on the

employee ER side so it's 25 if you're an

S corporation or twenty percent of your

schedule C plus the employee side so you

get the employer and the employee side

at a much lower dollar amount as far as

compensation goes so let's say you have

an S corporation where you're breaking

up your W-2 versus your distributions

those distributions while they're not

subject to cell of employment tax

they're also not eligible because

they're not considered earned income

they're not considered eligible for your

retirement plans so you can keep this

number much lower and get more money

into your solo than you can into your

sep that is one of the biggest reasons

why I like this plan and the second one

is that you can still take advantage of

getting clearing out your traditional

IRAs and getting into your solo and you

might be thinking well couldn't I do

that

with my workplace plan you could but I

don't recommend it and the reason I

don't is because the workplace 401K has

a limited amount of options into what

you can invest into and I like to have

more control over my retirement assets

so I would prefer them to be in a plan

like my solo 401K which you can invest

in basically any security that you could

in your traditional or your Roth IRAs so

you have a lot more flexibility and that

is the reason why I would go with the

solo 401K now that is also another

reason why if you don't have a

retirement plan and you don't have a

small business and you're still watching

this video get a side hustle to open up

one of these plans make a little bit of

a little bit of money then open one of

these plans clear out your traditional

IRA and then you're clear you're cleared

to do the backdoor strategy without the

pro router roll makes it a lot simpler

so even if you you know you don't have

one of these plans currently find a way

to get get that opened now as a last

note before we end this video now make

sure that when you're doing this stuff

that you're aware of the common

ownership roles because if you try to

open up a side business over here but

you have this business over here and

you're like well I want to do the solo

401K so I'm going to open up a business

where I'm the business owner and I have

no employees but if you have another

business and you're say like 100 owner

of it then you're gonna be required to

make contributions to their retirement

plan so that's going to land you some

hot water when you realize I've opened

up my solo 401K for this other business

but if you own multiple businesses

you're going to have a problem so just

be aware of that that um you need to

make sure that you understand how this

works workplace plans if you're an

employee that's no big deal you can have

your side hustle make those

contributions and you're in the clear so

that was a brief overview so to speak of

how these small business retirement

plans work together hopefully this chart

will help you out join the Discord

server we literally just start started

it if you have questions put them in the

Discord server hopefully we'll get to

them and maybe we'll do some more videos

based on those questions and thanks for

watching be sure to subscribe and we'll

see on the next one

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