Out-of-the-Ordinary Retirement Plan Options

If you are thinking about saving for retirement, there are many options. It’s usually pretty straightforward for an individual who is working for a large employer. You typically have an employer plan like a 401(k). Then you can save into IRAs in addition to this.

If you are a business owner, the options can get more complicated. It’s not a one size fits all kind of thing. I want to focus on some of the lesser-known retirement plans and how they work.

Uncommon retirement plans can provide great benefits for the owners as well as their employees. A couple of the lesser-known retirement plans are Keoghs, SIMPLE 401(k)s, Solo 401(k)s, and defined benefit or cash balance plans for small business owners.

4 Lesser-Known Retirement Plan Options

Retirement Plan #1: Simple 401(k)

A SIMPLE 401(k) is meant for small businesses. Employees can contribute up to $13,500 per year. You can contribute an additional $3,000 if you’re over age 50.

The employer can match up to 3% of the employee’s contributions. They can do a non-elective match of 2% for eligible employees even if they don’t contribute.

The difference between the SIMPLE 401(k) and the SIMPLE IRA is that there is a compensation cap with the SIMPLE 401(k). You are required to file a form 5500 annually even though you are not subject to annual testing requirements. Loans are permitted in SIMPLE 401(k) plans while they are prohibited in SIMPLE IRAs.

Retirement Plan #2: Solo 401(k)

A solo 401(k) is one of the best options for single business owners, as it allows you to save more money for retirement. This is in comparison to a SEP IRA or SIMPLE IRA, for example. Think of yourself as the employer and employee when making contributions.

In 2021 you can defer up to $19,500. If you’re over age 50 you can contribute an additional $6,500 for a total of $26,000. In addition to this, you can make a profit-sharing or matching contribution. This is 25% of w2 compensation or about 20% of net schedule C income. You can view my blog post for additional details here.

Retirement Plan #3: Defined Benefit Plans

High-income business owners may be able to use a defined benefit plan. This is also known as a pension plan.

They can be used with traditional 401(k) or profit-sharing plans. These plans can allow the owners to save into the six-figure range for retirement.

The factors for how much you can contribute are:

  1. The age of the owners
  2. The age of the participants
  3. Participant’s compensation
  4. Years of service

Usually the bigger the discrepancy between age and compensation the better for the owners.

Retirement Plan #4: Keogh Plans

The term Keogh is no longer used. That said, you may come across them. They are retirement plans for self-employed individuals who are unincorporated. They are sometimes referred to as HR 10 plans.

Keoghs are similar to a solo 401(k) or a SEP IRA. They can be employee-funded or employer-funded. There is no distinction in the law between unincorporated and incorporated businesses. This now makes the term Keogh unnecessary.

If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNERâ„¢, at Applied Capital. Email him at [email protected] or fill out a contact form.

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This blog is provided for informational purposes only. Such views are subject to change at any point without notice. The information in the blog should not be considered investment or tax advice or a recommendation to buy or sell any types of securities. Some of our blogs or information therein have been obtained from third party sources believed to be reliable but such information is not guaranteed. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.

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