Written by: Emily M. Harper, CFP®
While much attention has been paid to what the Secure Act 2.0 means for individuals saving for and living in retirement, the bill also included many goodies for business owners. From solo entrepreneurs to owners of larger companies with few or many employees, there’s something in there for everyone that could lead to better outcomes when it comes to running your business and building your post-exit future.
Sole Proprietors: Solo 401k Enhancements
Secure Act 2.0 gives sole proprietors more time to carefully consider what kind of retirement plan is right for them without the pressure to establish a plan by the end of a calendar year.
Unlike SEP IRAs, which can be established after the end of the year and funded with contributions for that year up until the individual tax filing deadline plus extensions (think October 2024 for the 2023 tax year), Solo 401ks had to be established by the end of a calendar year in order to make contributions to them for that year. This could require a lot of advanced planning in an uncertain world. Starting in 2023, sole proprietors are now able to establish a Solo 401k by the individual tax filing deadline (without extensions), meaning a plan could be established in April 2024 for the 2023 tax year. This gives business owners a few more months to strategize with their accountant to determine which plan is best to establish. There are often many adjustments to the financial statements happening after year-end which may drive some decision points.
While SEP IRAs and Solo 401ks are very similar, there are some key differences between the two that would lead an entrepreneur to choose one over another, including:
- How much you can contribute: There are limitations on SEP contributions based on self-employment compensation. The actual amount you can contribute may be less than the ceiling if your earnings are well below $330,000. Solo 401ks may allow higher contributions than a SEP IRA for those with earnings under $115,000.
- Complexity and Fees: SEP IRAs are very simple to set up and administer at virtually no cost. A Solo 401k has more paperwork and possible fees associated with them, along with IRS filing requirements.
Expanded Roth Options Benefit Both Business Owners & Employees
Secure Act 2.0 provides opportunities to contribute to a Roth employer-sponsored retirement account. This benefits everyone when it comes to building a source of tax-free wealth for the future. Business owners trying to attract or retain talent in a tight labor market have also been given a gift in the form of competitive retirement savings options to offer to their employees.
While Roth contributions don’t lower your taxable income when made, they do allow you to build tax-deferred earnings that eventually become tax-free when withdrawn after owning a Roth for at least 5 years and attaining age 59 ½.
It can be difficult to see into the future to know exactly what your tax rate will be in retirement; however, Roth contributions are a great way to manage the risk that changing tax rates and higher-than-expected future income can pose.
The Secure Act 2.0 introduced:
- Roth SIMPLE & SEP IRAs: SIMPLE & SEP IRAs are favored by many small businesses because they are cost-effective and easy to set up and administer, but they previously only allowed pre-tax contributions. As of 2023, business owners can offer IRA-based Roth retirement plans without having to create a 401k, which can be costly and burdensome to implement for small businesses or when a business owner needs flexibility with financial commitments.
- Roth Matching Contributions: Beginning in 2024, employers may also start offering Roth matching contributions. These contributions will be included in the employee’s taxable income and will still be tax deductible for employers.
- Roth matches are yet another benefit that financially savvy employees may be looking for and evaluating when making career decisions.
However, Roth matching contributions can’t be subject to a vesting schedule – meaning they belong to the employee no matter how long they work for the company. - As a business owner, you will need to consider the risk of employees leaving in the early years of employment and keeping their match. If you consider retirement plan matching contributions to be a retention tactic, you may need to (and should) think about other ways to retain talent.
- Roth matches are yet another benefit that financially savvy employees may be looking for and evaluating when making career decisions.
Help Employees Save for Retirement While Knocking Out Student Loan Debt
Speaking of new ways to attract and retain talent, this option is worth considering. Starting in 2024, employers can make “matching” contributions to retirement plans for amounts that an employee paid toward student debt. Student loans can create a substantial financial burden on those who use them to get the education required to launch their careers. When 42.8 million borrowers have federal student loan debt, it’s likely you have some employees who are struggling to balance student loan repayment with their other financial goals. Student loan repayment at the expense of saving for retirement can negatively impact future retirement security and overall employee well-being…which frankly impacts your business.
If you decide to adopt this provision as an employer, you will be helping your employees achieve better financial outcomes by building retirement savings when they may otherwise not have been able to. Saving early and allowing earnings to compound over many years is critical to secure retirements in a world where pensions are no longer the norm.
No Two Businesses Are Alike
The world of tax-deferred retirement plans is complex, and evolving legislation makes it harder to keep tabs on what’s best for your business. While there are many guidelines out there, your business won’t look exactly like another when it comes to employee demographics and circumstances, financials, and your values and priorities as a business owner.