Retirement Plans for Small Businesses in Hawaii

For business owners choosing a retirement plan for their business, there are a variety of options available. It’s important to take some time to explore these options and identify the choice that is the best fit for your business.

IRA-Based 

An IRA is an Individual Retirement Account, and they’re common among people who don’t have the option of opening a 401(k) through an employer – which can apply to business owners and self-employed people. It’s important to note that certain eligibility requirements must be met in order to open IRA accounts. These requirements relate to income and access to employer sponsored plans. 

There are several types of IRA-based plan options for business owners to consider. 

A traditional IRA is a good choice for new business owners – it’s simple to set up and allows you to contribute $6,000-7,000 per year. You contribute pre-tax dollars, the money grows tax-free, and then it’s taxed as income after you turn 59 ½. These IRAs operate in a very similar way to 401(k)s, except you fund them yourself. Setting these types of accounts up is usually simple and fast. 

A Roth IRA is a popular option for business owners who think they’ll be in a higher tax bracket after retirement. That’s because with this plan, you contribute taxed dollars that grow tax-free. You can withdraw them tax-free as well after age 59 ½. The same $6,000-7,000 yearly contribution limit applies here. Just like the traditional IRA, these are easy to set up and fund if you meet the eligibility requirements, but over time that lower contribution limit can hinder your retirement savings. 

A SEP IRA, or Simplified Employee Pension plan, lets you help your employees save for their retirements. It lets business owners contribute to traditional IRAs on behalf of their employees. It works best for companies that have only a handful of employees, partners, or a single-person shop. SEP IRAs operate mostly like a traditional IRA, except that the business owner can contribute up to 25% of the value of an employee’s compensation to the plan. Employers are not required to contribute every year, so they have the flexibility to forego contributions during leaner years.

A SIMPLE IRA, or Savings Incentive Match Plan for Employees plan, works better for bigger businesses who have up to 100 employees. SIMPLE plan contributions can be made to the traditional IRA accounts of employees. And these contributions are deductible as a business expense, so they can offer significant tax savings. As their name suggests, SIMPLE plans are quite easy to set up as well. 

Defined Contribution 

These kinds of plans are funded mostly by employees, so they’re a good option if you have a larger employee base and don’t want to take too much risk on the business itself. The classic example of a defined contribution plan is the 401(k). 

A profit-sharing plan allows an employer to share the company’s profits with employees, which can be highly motivating for employee performance. Business owners can contribute up to 20% of self-employment income or 25% of employee salary. These kinds of plans are subject to several requirements to ensure employees are treated fairly. They can also allow you to more highly reward employees who stay longer with the business, keeping retention rates high and avoiding paying too many benefits to short-term employees. 

A solo 401(k) plan is, like the name suggests, just for the self-employed. If your business has employees, this plan isn’t an option (unless your employee is also your spouse). However, a solo 401(k) can give self-employed people many of the benefits of an employer plan without having to actually work for one. They have high contribution limits – $58,000 in 2021 – and are very easy to open. They come in both Roth and traditional options, so you can choose based on what you expect your tax burden to be like in retirement. 

Defined Benefit 

For self-employed business owners with a lot of income and no employees, a defined benefit plan can be very attractive. You may also know these plans as pension plans.

Contributions are made by you (if you’re self-employed), or the business if applicable. You must contribute enough every year to fund the target annuity in retirement, and you are guaranteed a certain monthly income every month depending on the length of service to the company. These plans offer much higher tax-deductible contribution limits than defined contribution plans, but contribution requirements are much higher as well. That’s why these plans work best for very high earners who can commit to the annual contributions. Because these plans can become very expensive very quickly, you won’t find many modern businesses still offering them.