3 Retirement Saving Options for Small Business Owners


Being your own boss has its perks. Unfortunately, a built-in retirement plan isn’t one of them.


Small business owners and those who are self-employed have a number of possible avenues for saving for retirement regardless of whether you’re just starting out or want to save more. Here’s an overview of three of them.

1. Traditional and Roth IRAs

The first option for saving for retirement is an Individual Retirement Account (IRA). There are two basic types of IRAs to choose from: Traditional or Roth.


A Traditional IRA offers an upfront tax break in the form of a deduction for your contributions. Whether you can claim a full or partial deduction depends on your income and — if you’re married — whether your spouse is covered by an employer’s retirement plan. You pay income tax on your savings when you make qualified withdrawals in retirement.


As for a Roth IRA, there’s no deduction for contributions. Instead, you’re able to withdraw the money tax-free once you retire. The amount you can contribute to a Roth IRA is based on your modified adjusted gross income and tax filing status.


For 2017, the annual contribution limit to either type of IRA is $5,500, plus an extra $1,000 if you’re 50 or older.


So which one is right for you? The answer ultimately depends on how much you’re earning and what you expect your tax bracket to be at retirement. For example, if you’re starting a new business in your 30s, you could consider a Roth IRA if you think your income will climb steadily. Someone who’s in their 50s, on the other hand, may prefer to get the tax deduction now if they plan to sell their business once they reach retirement age.


You could also consider an IRA certificate of deposit (CD). An IRA CD works like any other CD: The bank holds your money in the CD for a set period of time, during which your savings earn interest. Once the CD matures, you can cash it out or roll it over into a new CD. The difference is that an IRA CD has the tax benefits of an IRA and sometimes they can carry a higher interest rate than a typical CD.


A financial consultant can walk you through these and other considerations to arrive at a strategy that aligns with your goals.


If you run a small business that has employees, a SIMPLE IRA or SEP IRA can give you more savings power.


A Savings Incentive Match Plan for Employees (SIMPLE) IRA is available to businesses with 100 or fewer employees. For 2017, self-employed savers can contribute up to $12,500 to a SIMPLE IRA. (You can tack on another $3,000 if you’re 50 or older.)


According to the IRS, this type of plan requires (and limits) the employer to make contributions in one of two ways:

  1. Match your employees’ contributions dollar-for-dollar up to 3% of their compensation, which is not limited by the annual compensation limit, or
  2. Contribute 2% of each eligible employee’s compensation whether or not they contribute to the account

The majority of funding for a SIMPLE IRA comes from employee contributions, so the funding burden is not on the small business owner. It’s also worth noting that the employer cannot have any other retirement plan if they use a SIMPLE IRA.


A Simplified Employee Pension (SEP) IRA is available to all businesses regardless of size, which means you can contribute if you’re a sole proprietor with no employees or the founder of a startup with a staff of 150. With this type of account, contributions are made to a traditional IRA by the employer only; employees do not make contributions.


The contribution limit is set at 25% of each employee’s compensation with a contribution cap of $54,000 for 2017. The same limits apply for the self-employed, but there are certain rules that determine the maximum deductible contribution.


With both SIMPLE and SEP IRAs, your contributions are tax-deductible. Your earnings grow tax-deferred and withdrawals are taxed as ordinary income when you retire.

3. Health Savings Account (HSA)

If you’re self-employed, you probably already know that you can snag a tax deduction for your health insurance premiums, but your policy may include a retirement benefit that you’re not aware of. If you’re enrolled in a high deductible plan, you could grow your assets using a Health Savings Account (HSA).


These are tax-advantaged accounts designed to let you save money for future medical expenses, but they can double as a supplement to your existing retirement savings. That’s because when you turn 65, you can withdraw money from an HSA for any purpose — not just medical — without a tax penalty. You would, however, have to pay ordinary income tax on the withdrawal.

The bottom line

There’s no one-size-fits-all savings solution when you’re self-employed or a small business owner. What works for a freelancer may not be the right fit for someone running a locally-owned business, so look for the option that best suits your needs.

More information

Everyone has their own expectations and goals for retirement. To learn how we can help you prepare for the retirement you want, schedule a Citizens Retirement Checkup at your nearest Citizens Bank Branch.


Disclaimer: Views expressed may not necessarily reflect those of Citizens Bank. The information contained herein is for informational purposes only as a service to the public, and is not legal advice or a substitute for legal counsel, nor does it constitute advertising or a solicitation. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.


Citizens Bank Wealth Management is comprised of both banking and brokerage affiliated companies.