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Understand retirement planning options that help you keep more of what you earn, while also investing in your future.

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Self-Employed 401(k)

A 401(k) plan for a self-employed individual with no employees other than a spouse.

Easy-to-maintain plan for a self-employed individual or small-business owner, with fewer than 5 employees 1 .

A low-complexity plan for businesses with fewer than 100 employees looking to offer a retirement benefit.

Fidelity Advantage 401(k)

An affordable plan for small businesses looking to offer a 401(k) for the first time.

Fidelity 401(k)

An industry-leading 2 , customizable 401(k) that supports existing plans $1M and up.

Investment-only account 3

A brokerage account for those who have their own separate retirement plan document.

Whether it’s just you or you and your employees, we have a retirement plan that’s right for you. Take a look at how they compare and find one that fits your needs.

Already have a 401(k) plan with another provider? Learn more about the support and value we can deliver with a Fidelity 401(k).

If you have a separate retirement plan established and you’d like to invest the assets in a Fidelity brokerage account, you may be interested in an investment-only retirement account. 3

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Who is the plan for?

SE 401(k) : Self-employed individual or business owner with no employees other than a spouse.

SEP IRA : Self-employed individual or small business owner, primarily those with only a few employees. 1

Fidelity Advantage 401(k) : Small and medium- sized businesses looking to offer a 401(k) for the first time.

SIMPLE IRA : Self-employed individuals or businesses with 100 or fewer employees.

How do contributions work?

SE 401(k) : Employers may contribute up to 25% of compensation, up to a maximum of $69,000 in 2024 ($76,500 if age 50 or older).⁵ Employees may contribute up to $23,000 for 2024 ($30,500 if age 50 or older).⁵

SEP IRA : Employers may contribute between 0% and 25% of compensation up to a maximum of $69,000 for 2024.⁵ Each eligible employee must receive the same percentage.

Fidelity Advantage 401(k) : Employers make matching contributions, up to 4% of the annual gross compensation of all employees.⁴ Employees may contribute up to $23,000 for 2024 (catch up contributions available).⁵

SIMPLE IRA : Employers contribute either a matching contribution of 1, 2, or 3% or a non-elective contribution of 2%. 7 Participants may contribute up to 100% of compensation with a maximum of $16,000 for 2024 ($19,500 if age 50 or older). 8

Who can contribute?

SE 401(k) : As someone who's self-employed, you can contribute as both employer and employee.

SEP IRA : Only the employer can contribute.

Fidelity Advantage 401(k) : Both employees and employers can contribute.

SIMPLE IRA : Both employees and employers can contribute.

What about fees and tax credits?

SE 401(k) : There are no account fees and no minimum to open an account, $0 commission for online US stocks and ETF trades.⁶

SEP IRA : There are no account fees and no minimum to open an account. $0 commission for online US stocks and ETF trades.⁶

Fidelity Advantage 401(k) : There are no additional management fees or, with limited exceptions, fund expenses beyond the $300 per quarter fee.

SIMPLE IRA : There are no account fees and no minimum to open an account, $0 commission for online US stocks and ETF trades.⁶

When can withdrawals be made?

SE 401(k) : You can take a withdrawal once you’ve had a triggering event, such as disability, plan termination, turning age 59 ½ or older, and a few others. However, some withdrawals may incur a 10% penalty. 4

SEP IRA : You can withdraw at any time, but a 10% penalty may apply if you're not yet age 59½. 4

Fidelity Advantage 401(k) : You can take a withdrawal once you’ve had a triggering event, such as disability, plan termination, turning age 59½ or older, and a few others.⁴ However, some withdrawals may incur a 10% penalty. In the event of certain types of financial emergencies, you may be able to take a hardship withdrawal.

SIMPLE IRA : You can withdraw at any time, but a 10% (or 25% if within the first two years of participation) penalty may apply if you're not yet age 59½. 4

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5 Self-Employed Retirement Plans to Consider

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Being self-employed gives you a certain measure of freedom, but it doesn’t give you an excuse to skip out on saving for retirement.

In fact, it makes putting money away that much more crucial: Unlike an employee who might have access to a 401(k), you’re on your own.

And you might think you'll eventually sell the business and use that money to fund retirement, but what if you don't? Consider a retirement account not only a cushion, but also a tax-advantaged way to reduce income in your high-earning years.

First, you'll want to figure out how much you need to save for retirement with NerdWallet’s retirement calculator . The amount you plan to save each year will help determine the best account for you.

Then decide where to put that money. The good news is that flying solo gives you a lot of options. Here are five self-employed retirement plans that may work for you:

Traditional or Roth IRA

Solo 401(k)

Defined benefit plan

on Capitalize's website

1. Traditional or Roth IRA

Best for: Those just starting out. If you’re leaving a job to start a business, you can also roll your old 401(k) into an IRA .

IRA contribution limit : $7,000 in 2024 ($8,000 if age 50 or older) .

Tax advantage: Tax deduction on contributions to a traditional IRA; no immediate deduction for Roth IRA, but withdrawals in retirement are tax-free.

Employee element: None. These are individual plans. If you have employees, they can set up and contribute to their own IRAs.

» In just a few minutes, you can open an IRA at an online brokerage. Review NerdWallet's picks for the best IRA providers to get started.

The details

An IRA is probably the easiest way for self-employed people to start saving for retirement. There are no special filing requirements, and you can use it whether or not you have employees.

The toughest part might be deciding which type of IRA to open: We’ve given in-depth coverage to the differences between traditional and Roth IRAs , but the tax treatment of a Roth IRA might be ideal if it’s early days for your business (read: you’re not making much money). In that case, your tax rate is likely to be higher in retirement, when you’ll be able to pull that money out tax free. Roth IRAs also don't have required minimum distributions, and Roth IRAs can be transferred to your heirs , tax-free.

One note: The Roth IRA has income limits for eligibility; those who earn too much can't contribute.

» Learn more about IRAs

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2. Solo 401(k)

Best for: A business owner or self-employed person with no employees (except a spouse, if applicable).

Contribution limit: For 2024, it's $69,000, plus a $7,500 catch-up contribution or 100% of earned income, whichever is less [0] IRS.gov . 2024 Limitations Adjusted as Provided in Section 415(d), etc. . Accessed Mar 16, 2022. View all sources , whichever is less. To help understand the contribution limits here, it helps to pretend you’re two people: An employer (of yourself) and an employee (also of yourself).

In your capacity as the employee, you can contribute as you would to a standard employer-offered 401(k), with salary deferrals in 2024 of up to 100% of your compensation or $23,000, plus that $7,500 catch-up contribution, if eligible, whichever is less.

In your capacity as the employer, you can make an additional contribution of up to 25% of compensation. Employer contributions must be made by the tax filing deadline , or extension date if applicable.

There is a special rule for sole proprietors and single-member LLCs: You can contribute 25% of net self-employment income, which is your net profit less half your self-employment tax and the plan contributions you made for yourself.

The limit on compensation that can be used to factor your contribution is $345,000 in 2024.

Tax advantage: This plan works just like a standard, employer-offered 401(k): You make contributions pretax, and distributions after age 59½ are taxed.

Employee element: You can’t contribute to a solo 401(k) if you have employees. But you can hire your spouse so they can also contribute to the plan. Your spouse can contribute up to the standard employee 401(k) contribution limit , plus you can add in the employer contributions, for up to a total of $69,000 in 2024, plus catch-up contribution, if eligible. This potentially doubles what you can save as a couple.

How to get started: You can open a solo 401(k) at many online brokers. You’ll need to file paperwork with the IRS each year once you have more than $250,000 in your account.

This plan, which the IRS calls a “one-participant 401(k),” is particularly attractive for those who can and want to save a great deal of money for retirement or those who want to save a lot in some years — say, when business is flush — and less in others.

Keep in mind that the contribution limits apply per person, not per plan — so if you also have outside employment that offers a 401(k), or your spouse does, the contribution limits cover both plans.

One other thing to know: You can also choose a solo Roth 401(k) , which mimics the tax treatment of a Roth IRA. Again, you might go with this option if your income and tax rate are lower now than you expect them to be in retirement.

» Learn more about the solo 401(k)

Best for: Self-employed people or small-business owners with no or few employees.

Contribution limit: The lesser of $66,000 in 2023, $69,000 in 2024, or up to 25% of compensation or net self-employment earnings, with a $330,000 limit on compensation ($345,000 in 2024) that can be used to factor the contribution. Again, net self-employment income is net profit less half of your self-employment taxes paid and your SEP contribution. No catch-up contribution. Be sure to make your contributions by the federal income tax filing deadline, usually mid-April, or the extension deadline if filing for extension.

Tax advantage: You can deduct the lesser of your contributions or 25% of net self-employment earnings or compensation — limited to that $330,000 cap per employee in 2023 ($345,000 in 2024) — on your tax return. Distributions in retirement are taxed as income. Previously, there was no Roth version of a SEP IRA. Under legislation signed by President Biden in December 2022, Roth contributions are now allowed [0] Senate.gov . SECURE 2.0 Act of 2022 . View all sources .

Employee element: Employers must contribute an equal percentage of salary for each eligible employee, and you are counted as an employee. That means if you contribute 10% of your compensation for yourself, you must contribute 10% of each eligible employee’s compensation.

Get started: You can open a SEP IRA at many online brokers just as you would a traditional or Roth IRA, with a few extra pieces of paperwork.

A SEP IRA is easier than a solo 401(k) to maintain — there’s a low administrative burden with limited paperwork and no annual reporting to the IRS — and has similarly high contribution limits. Like the solo 401(k), SEP IRAs are flexible in that you do not have to contribute every year.

The downside for you, as the business owner, is that you have to make contributions for employees, and they must be equal — not in dollar amount, but as a percentage of pay — to the ones you make for yourself. That can be costly if you have more than a few employees or if you’d like to put away a great deal for your own retirement. You cannot simply use a SEP to save for yourself; if you contribute for the year, you have to make contributions for all eligible employees.

» Learn more about SEP IRAs

4. SIMPLE IRA

Best for: Larger businesses, with up to 100 employees.

Contribution limit: Up to $15,500 in 2023, plus catch-up contribution of $3,500 in 2023 if you're 50 or older (up to $16,000, plus a catch-up contribution of $3,500 in 2024). If you also contribute to an employer plan, the total of all contributions can’t exceed $22,500 in 2023 or $23,000 in 2024. Contributions must also be made by tax day or the extension deadline if applicable.

Tax advantage: Contributions to a traditional SIMPLE IRA are deductible, but distributions in retirement are taxed. Contributions made to employee accounts are deductible as a business expense. The legislation signed into law in December 2022 allows for Roth contributions, effective in 2023.

Employee element: Unlike the SEP IRA, the contribution burden isn’t solely on you: Employees can contribute through salary deferral. But employers are generally required to make either matching contributions to employee accounts of up to 3% of employee compensation, or fixed contributions of 2% to every eligible employee. Choosing the latter means the employee does not have to contribute to earn your contribution. The compensation limit for factoring contributions is $330,000 in 2023, $345,000 in 2024.

Get started: The process is similar to a SEP IRA — you can open a SIMPLE at an online broker, with a heavier paperwork load than your standard IRA.

If you’re the owner of a midsize company with fewer than 100 employees, the SIMPLE is a fairly good option, as it’s easy to set up and the accounts are owned by the employees.

SIMPLE IRA contribution limits are significantly lower than a SEP IRA or solo 401(k), however, and you may end up having to make mandatory contributions to employee accounts, which can be expensive if you have a large number of employees who participate. Here's more on the SIMPLE IRA vs. a 401(k) .

The traditional SIMPLE IRA is also inflexible, particularly early on: Early withdrawals, before age 59½, are treated the same as early 401(k) or IRA distributions, in that they are taxed as income and subject to 10% penalty. But if you make a withdrawal within the first two years of participation in a SIMPLE IRA, the 10% penalty is increased to 25%. That means you also can’t roll over a SIMPLE to another retirement account within that two-year period. Zing.

One other thing to know: There is a 401(k) version of a SIMPLE, which works in much the same way but allows participants to take loans from their accounts. This version requires more administrative oversight and can be more expensive to set up.

» Learn more about the SIMPLE IRA

5. Defined benefit plan

Best for: A self-employed person with no employees who has a high income and wants to save a lot for retirement on an ongoing basis.

Contribution limit: Calculated based on the benefit you’ll receive at retirement, your age and expected investment returns.

Tax advantage: Contributions are generally tax deductible, and distributions in retirement are taxed as income. An actuary must figure your deduction limit, which adds an administrative layer.

Employee benefit: If you have employees, you generally offer this plan to them and make contributions on their behalf.

Get started: Your options for brokerages are more limited than with the above accounts, but Charles Schwab offers defined benefit plans.

People often lament the decline of pension plans, and this is exactly that: If you’re self-employed, you can set up your own pension — a guaranteed stream of income — in retirement by using a defined benefit plan.

So why wouldn’t everyone do it? They’re expensive, with high setup and annual fees. If you have employees, that fee will likely go up, and you’ll need to contribute on their behalf. They carry a heavy administrative burden each year, and they require a commitment to fund the plan with a certain amount per year. If you need to change that amount, you’ll pay additional fees. To make it worth it, you'd need to continue the plan for at least three years, financial advisors say.

The upsides are that you can stash a lot of cash in these, and you can defer taxes until retirement. If you’re fairly close to retirement, earning a high income that you know you’ll maintain and that allows you to save a significant amount per year — we’re talking $50,000 to $80,000 or more — you might consider using this plan to supercharge your savings efforts.

» Thinking about the future? Learn about succession planning for your business .

Where to open a retirement plan if you’re self-employed

Once you’ve decided to open one of these accounts, you’ll have to decide where to do it.

Most online brokers will allow you to open the four most common account types: IRA, solo 401(k), SEP IRA and SIMPLE IRA. » Ready to get started? Seek our picks for the best IRA providers

Each broker will walk you through the process of opening one of these accounts and explain any paperwork you may need to file with the IRS. But to be on the safe side, you may also want to work with an accountant.

Most financial advisors can also set up retirement plans for you.  

» Want help planning for retirement? Check out our retirement planning guide .

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Get a retirement plan that’s right for your business

We offer a variety of tax-advantaged small-business plans for self-employed professionals, entrepreneurs, and business owners and their employees.

Access your small-business plan.

Consider small-business retirement plans.

Check out the advantages of each one.

Individual 401(k)

An Individual 401(k) maximizes retirement savings if you're self-employed or a business owner with no employees other than a spouse. We also offer an Individual Roth 401(k) option.

Learn about Individual 401(k)s

With generous contribution limits, the SEP-IRA (Simplified Employee Pension) plan is the simplest, most flexible, tax-deferred retirement plan you can sponsor.

Learn about SEP-IRAs

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a great starter plan that encourages employees to contribute.

Learn about SIMPLE-IRAs

Small plan 401(k)

Our program for small- and mid-sized businesses is a high-quality, easy-to-administer retirement offer for 401(k) plans, 403(b) plans and other retirement plan types.

Learn about the Small plan 401(k)

Compare plans side-by-side

Why choose Vanguard for your small business?

Selecting Vanguard for your retirement plan means you can expect high-quality, low-cost funds; investment flexibility; and exceptional service—all from a partner trusted by businesses like yours to align with our clients' interests.

Jump start your savings

As a small-business owner, planning for your retirement is entirely up to you. And if you employ others, you'll be helping them get on the right track for retirement too.

Benefit from tax breaks

All retirement plans offer tax-deferred growth on earnings. As an employer, you also benefit from tax-deductible employer contributions.

Give your money a chance to grow

In addition to your plan contributions, the compounding of interest, dividends, and capital gains allows your account to generate earnings on top of earnings.

Attract and retain employees

Offering a retirement plan to your employees can keep you competitive in the job marketplace and help your business flourish.

Size up your retirement plan

Get to know the retirement plans that Vanguard offers for small businesses: the SEP-IRA, the SIMPLE IRA, the Individual 401(k), and the Small Plan 401(k). Try our interactive tool to see which plan may be best for you and your business.

Ready to get started?

If you're new to Vanguard, give us a call so we can help you get started with your plan.

800-992-7188

Are you a Vanguard client looking for a small-business plan? Set up your new plan today.

Learn more about small-business retirement

Enhance your retirement plan

Looking to enrich your existing retirement plan with quality mutual funds? Our investment-only service opens the door for you to offer Vanguard funds. 

Learn about our investment-only option

Move your plan to Vanguard

Consider moving the small-business plan you hold elsewhere to Vanguard. You can enjoy high-quality, low-cost funds and reliable service for your portfolio.

Learn how to transfer your plan

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• Traditional Retirement Strategies
• Exit Strategies for Your Business

The Bottom Line

• Small Business

Retirement Strategies for Small Business Owners

Amy Fontinelle has more than 15 years of experience covering personal finance, corporate finance and investing.

As a small business owner, you are completely responsible for your own retirement planning. If you have employees, you may feel responsible for helping them plan for a successful retirement. The considerations and retirement savings plans that work for you, as a small business owner, should be paramount when planning for both your own retirement and that of your employees.

Key Takeaways

• Small business owners are responsible for their own retirement planning as well as that of their employees.
• Though ideally, a small business owner can sell their business before retirement for a tidy profit, this is not always guaranteed nor is the sale amount.
• Some ways small business owners can ensure retirement savings are by establishing a SIMPLE IRA, a SEP IRA, a traditional or Roth IRA, and a Solo 401(k).

Choose a Traditional Retirement Strategy

There are some traditional options other than using your small business to fund your retirement, such as IRAs and 401(k)s, that function as additional sources of retirement income other than liquidating your small business.

Establish a SIMPLE IRA

The savings incentive match plan for employees, or SIMPLE IRA , is one retirement plan available to small businesses. In 2023, employees can defer up to $15,500 of their salary, pretax (rising to $16,000 in 2024). Those who are 50 or older can defer up to $19,000 by taking advantage of a $3,500 catch-up contribution.

The catch-up contribution remains at $3,500 in 2024, so the total that those who are 50 or older can defer is $19,500. However, employees who participate in other employer-sponsored plans can contribute no more than $22,500 in all employer-sponsored plans combined (rising to $23,000 in 2024).

Employers can match employee contributions to a SIMPLE IRA up to 3% of the employee’s compensation. Conversely, employers can contribute 2% of each eligible employee’s compensation of up to $330,000 in 2023 (rising to $345,000 in 2024). Employer contributions are tax-deductible.  

Businesses are not required to provide employees with any retirement plans. These are generally seen as a benefit. If your company doesn't provide one, you have other options , the best of which is opening a traditional or Roth IRA.

Set Up a SEP IRA

A simplified employee pension (SEP) is another type of individual retirement account (IRA) to which small business owners and their employees can contribute. In 2023, it lets employees make pretax contributions of up to 25% of income or $66,000 (rising to $69,000 in 2024), whichever is less.

Like a SIMPLE plan, a SEP lets small business owners make tax-deductible contributions on behalf of eligible employees, and employees won’t pay taxes on the amounts an employer contributes on their behalf until they take distributions from the plan when they retire.

Almost any small business can establish a SEP. It doesn't matter how few employees you have or whether your business is structured as a sole proprietorship, partnership, corporation, or nonprofit. Each year, you can decide how much to contribute on behalf of your employees, so you aren’t locked into making a contribution if your business has a bad year. Owners of the business are also considered employees and can make employee contributions to their own accounts.

Overall, the SEP plan is a better option for many small businesses because it allows for larger contributions and greater flexibility.

IRAs and Solo 401(k)s

If you’re in a competitive field and want to attract the best talent, you might need to offer a retirement plan, such as the two described above. However, employers are not required to offer retirement benefits to their employees. If you don't, one way you can save for your own retirement without involving your employees is through a Roth or traditional IRA , which anyone with employment income can contribute to.

You can also contribute to an IRA on your spouse’s behalf. Roth IRAs let you contribute after-tax dollars and take tax-free distributions in retirement; traditional IRAs let you contribute pretax dollars, but you’ll pay tax on the distributions. The most you can contribute to an IRA in 2023 is $6,500 or $7,500 if you’re 50 or older. These limits increase to $7,000 and $8,000 respectively for the tax year 2024.

Finally, if your small business has no eligible employees other than your spouse, you can contribute to a Solo 401(k) .

Develop an Exit Strategy for Your Business

It might seem strange that developing a business exit strategy should be one of your first considerations when planning for retirement. But consider this: the small business you spend your life building might become your largest asset.

If you want it to fund your retirement—and to stop working—you’ll need to liquidate your investment. To prepare to sell your small business one day, it needs to be able to operate without you. It’s never too early to start thinking about how to accomplish that goal and about how to find the best buyer for your small business. 

Market conditions will affect your ability to sell your business. You might want to build flexibility into your retirement plan so you can sell your stake during a strong market or work longer if a recession hits.

You definitely want to avoid a distress sale: One problem you’ll encounter if you wait until the last minute to exit your business is that your impending retirement will create the impression of a distress sale among potential buyers and you won’t be able to sell your company at a premium. 

Why Do Small Businesses Not Offer 401(k)s?

Sometimes small businesses do not offer 401(k)s simply because they do not have the resources for it. The small business owner may not have the time or knowledge to put together a 401(k) for the company. They may also not have access to a trusted financial institution that can provide one. Furthermore, it may be too costly for the company to set up a 401(k).

Can You Start a Retirement Plan on Your Own?

Yes, you can start a retirement plan on your own. The most simple way is to establish a traditional or Roth IRA and start contributing. Depending on your specific situation, you may also be able to open a Solo 401(k).

How Much Can You Contribute to an IRA?

The amount you can contribute to an IRA (traditional or Roth) in 2023 is $6,500. This rises to $7,000 in 2024. For both years, if you are 50 and over, you can contribute an additional $1,000.

Many small business owners say that they don't want to retire, or at least not retire fully. But even if you’re among the many small business owners who plan to keep working, establishing a retirement plan for your small business is a good idea because it gives you options—and having options means you’ll feel more satisfied with whatever path you choose. 

Internal Revenue Service. " 2024 Limitations Adjusted as Provided in Section 415(d), etc.; Notice 2023-75 ." Pages 1-2.

Internal Revenue Service. " SIMPLE IRA Plan ."

Internal Revenue Service. " 2024 Limitations Adjusted as Provided in Section 415(d), etc.; Notice 2023-75 ." Page 1.

Internal Revenue Service. " Simplified Employee Pension Plan (SEP) .”

Internal Revenue Service. “ SEP Plan Fix-It Guide - SEP Plan Overview .”

Internal Revenue Service. " Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) ." Page 9.

Internal Revenue Service. " IRA-Based Plans ."

Internal Revenue Service. " 401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000 ."

Internal Revenue Service. " One-Participant 401(k) Plans ."

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• There are several retirement plans good for small business owners — including self-employed workers.
• Each type of account has certain pros and cons and offers different requirements and limitations.
• These decisions shouldn't be made lightly; a financial planner can help you find your best option.

Starting and operating a small business is no small feat. At some point every entrepreneur will face some common challenges. One of the most common questions I receive from my business owner clients is how to save for retirement .

Luckily, there are several retirement plan options to choose from. However, choosing the right plan depends on many factors such as the size of your business, the number of employees you have, and your financial goals. Here are five retirement plan options I recommend to my business owner clients.

The SEP IRA is one of the easiest retirement plan options to set up for small business owners. A SEP IRA can be utilized by business owners with any number of employees. However, if you have employees, be aware that you have to contribute the same percentage to your employee's account as you do to your own.

In 2024, employers may contribute up to 25% of wages or $69,000, whichever is less. A SEP IRA is easy to set up and has low maintenance costs and allows for pre-tax or Roth contributions. Contributions are not required each year, and they can be made up to the tax filing deadline, including extensions. Additionally, they may be used in addition to a traditional IRA or Roth IRA .

However, no catch-up contributions are allowed. You have to contribute the same percentage of compensation to your employee accounts as you do to your own, and employee contributions aren't allowed. The SEP IRA doesn't allow for loans and withdrawals — you generally can't access your funds penalty-free until age 59½, except for some rare exceptions.

2. Solo 401(k)

A solo 401(k) is a great retirement plan option for business owners with no employees (besides a spouse, potentially). Many entrepreneurs enjoy this option because it is like an employer-sponsored 401(k) that they may have had at a previous job. A solo 401(k) can be used in addition to a traditional IRA or a Roth IRA.

This plan allows you to make contributions as both the employer and the employee. In 2024, employees can contribute up to $23,000, or $30,500 if you are 50 or older. As the employer, you can make an additional contribution of up to 25% of compensation. The combined contribution limit is $69,000, or $76,500 for those 50 or older.

Like SEP IRAs, solo 401(k)s allow pre-tax and Roth contributions, but they also allow for employee loans and hardship withdrawals. Both employee and employer contributions are allowed, and employer contributions can be made up to the tax filing deadline, including extensions — employee contributions, though, generally need to be made before the end of the year.

Additionally, a solo 401(k) is more costly and complicated to set up, and it cannot be used if you hire employees. You'll also be required to report it to the IRS once your account balance reaches $250,000. You also can't access your funds penalty-free until age 59½ unless you meet one of the exceptions.

3. SIMPLE IRA

The is another retirement plan option for small business owners that is easy to set up. This option is available to small business owners with no more than 100 employees. In 2024, employees may contribute up to $16,000, or $19,500 for those age 50 and older. Employers must contribute to all their employees' SIMPLE IRA via one of two options.

Like the SEP IRA and solo 401(k), the SIMPLE IRA allows pre-tax and Roth contributions, and it can be used in addition to a traditional IRA or a Roth IRA. It's easy to set up and has low maintenance costs. It requires employer contributions (up to the tax filing deadline) and allows employee contributions (within 30 days after the end of the tax year). Again, you can't usually access funds penalty-free until age 59½.

4. Traditional IRA

A traditional IRA is one of the many available IRA retirement accounts that offer tax savings. Any small-business owner can open and fund this type of account. In 2024, the contribution limit is $7,000 per year ($8,000 if age 50 or older).

Contributions to this account are either pre-tax or after-tax depending on if you (or your spouse) are covered by an employer's plan and your adjusted gross income. If you or your spouse are covered by an employer's plan, then your contribution may be partially or non-tax deductible based on your income for that tax year .

5. Roth IRA

A Roth IRA is a retirement account that offers tax-free withdrawals in retirement funded by after-tax contributions. A small-business owner can open and fund this type of account if they are below the income thresholds defined by the IRS . Many small business owners choose to fund a Roth IRA during years when their income is below the threshold. In 2024, the contribution limit is $7,000 a year ($8,000 if age 50 or older).

One of the biggest tax benefits of the Roth IRA is that you can avoid paying taxes on your earnings. In addition, money in a Roth IRA is accessible penalty- and tax-free if your account has been open for at least five years.

There are many other limitations and features of each plan to consider before deciding. Small business owners should not take this decision lightly. You should carefully consider your overall financial and business goals before selecting a plan. Consulting with a financial advisor or CPA can help you determine the best retirement plan for your specific needs.

Earn Rewards on Your Everyday Business Expenses The best business credit cards can help you reinvest rewards into your business. The best cards offer high earning rates in the categories that your business spends the most in each month.

Watch: Mark Cuban explains why a 401(k) is a no-brainer

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Small business retirement plans made simple

Help your employees prepare for the future with a solution that fits your business., are your employees saving enough for retirement.

Making ends meet and saving for retirement at the same time can be a challenge for today’s employees. Many don’t have a plan or haven’t saved even a fraction of what they would need to retire comfortably. We aim to fix that.

As a business owner, you can help start your employees on a path to a better future. A Simply Retirement by Principal ® 401(k) plan is an easy way for them to save money now with the potential to have it grow over the years so they can enjoy retirement.

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What Simply Retirement by Principal ® can do for you

Setting up a workplace retirement plan isn’t something you do every day. We get it. Maybe you aren’t even sure where to start. Simply Retirement by Principal ® makes it easy to learn more about retirement plans and what’s involved. And when you’re ready, you can use our planner to see what a plan might look like for your business and estimate costs.

Take advantage of SECURE 2.0 Act tax credits to help offset up to 100% of (up to $5,000 per tax year for the first three years for some employers) your first three years of plan startup costs. The benefits of the SECURE 2.0 Act.

Simple selections

Set up your plan 100% online, where and when it’s convenient for you—or call if you have questions. We’ve streamlined the investment selection and simplified the paperwork, too.

Simple pricing

The low, flat-fee recordkeeping pricing makes a 401(k) plan affordable for small businesses. It’s a straightforward cost you can plan for each month.

Simple onboarding

After you purchase your plan, you’ll enroll your employees through the Ubiquity Retirement + Savings ® platform—used by thousands of small businesses across the U.S.

Simple administration

Ubiquity’s user-friendly dashboard will help you manage your plan and save time with features like automated notifications and payroll integration.

Take advantage of SECURE 2.0 Act tax credits to help offset your first three years of plan startup costs. * The benefits of the SECURE 2.0 Act.

Simply Retirement by Principal ® costs

One-time setup fee for bundled plans.

Every month

Recordkeeping fee will be billed to business owners quarterly ($435 plus per-participant fees). Pricing shown applies when working with a third party administrator (TPA). With bundled pricing, the recordkeeping fee is $185 per month ($555 billed quarterly) plus per-participant fees. Custodial fees, investment fees, and financial professional and TPA fees (if applicable) are additional.

Cost savings with flat-fee 401(k) plan pricing

Other 401(k) plans may increase recordkeeping fees to business owners as the total account balances increase. not with the simply retirement by principal ® 401(k) plan. no guessing and no changes as your employees contribute. it’s a predictable model you can plan for..

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Simply Retirement by Principal ® combines more than 75 years of retirement expertise from Principal ® * with the digital technology and services of Ubiquity Retirement + Savings ® . We’ve come together to help make retirement plans a reality for more small businesses.

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What are the tax benefits for starting a new 401(k) plan?

A new enhancement was made to the tax credits intended to help cover the costs for small employers that choose to offer new defined contribution plans. Small employers with 50 or fewer employees can now count 100% (maximum $5,000 a year) of their qualified plan expenses toward the tax credit calculation, allowing more employers the ability to maximize the  tax credit.

What is a 401(k) plan, and how does it compare?

401(k) plans allow employees to set aside a portion of their pay, typically before taxes. Employers can make contributions to the employees’ retirement plan if they choose.

What’s involved in managing a 401(k) plan?

The program automates many of the tasks required, but you’ll still have a few basic responsibilities as the plan administrator. Here’s what you need to know.

Small business growth platform

With a Simply Retirement by Principal ® plan, you have access to Elevate by Principal, a powerful network, resource, and team of people in your corner. From data-driven insights to deep discounts on products and services you use everyday, Elevate by Principal can provide what you need to take your business to the next level.

Intended for plan sponsor use.

Start-up tax credit modification: Small employers with 50 or fewer employees may apply 100% of qualified start-up costs towards the tax credit formula (up to $5,000 per year).

• Applicable to small employers with 50 or fewer employees.
• For employees with 51-100 employees: The credit is phased out by reducing the amount of credit each year 2% for each employee in excess of 50.

1st and 2nd year = 100%, 3rd year = 75%, 4th year = 50%, 5th year = 25%, 6th year = 0%

No contributions may be counted for employees with wages in excess of $100,000 (inflation adjusted). If taking advantage of this tax credit, employer contributions may not also be counted towards “start-up costs” in the start-up tax credit calculation.

*Recordkeeping-fee: Pricing shown applies when working with a TPA. Bundled pricing is a $500 initial setup fee, then $185 per month. Fees paid by the business owner are billed quarterly. Fees paid by participants are deducted monthly from participant accounts. Participant fees are charged if there is a $100 account balance, regardless of whether the participant is active or inactive. Custodial and investment fees are charged against participating employees’ accounts (those vary by investment and range from 0.03% - 0.86%, as of December 31, 2023). If the business owner chooses to work with a financial professional and/or TPA, their fees are also additional and may be billed to the business owner. Financial professional fees may be deducted from participant accounts.

*What’s included: Plan costs are billed quarterly. Custodial and investment fees are charged against participating employees’ accounts (those vary by investment and range from 0.03% to 0.86%, as of December 31, 2023). If the business owner chooses to work with a financial professional and/or TPA, their fees are separate and may be billed to the business owner. Financial professional fees may be deducted from participant accounts.

*Principal: As of December 31, 2023

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Retirement Plans for Small Business Owners: Choosing the Best Option

• August 27, 2023
• Entrepreneurship & Startups

Looking for the best retirement plan for your small business? Wondering how to attract and retain talented employees? With so many options out there, it can be overwhelming. But don’t worry, we’ve got you covered.

In this article, we’ll guide you through the process of choosing the right retirement plan for your business. From evaluating benefits to understanding tax implications, we’ll provide all the information you need to make an informed decision.

So, let’s get started and find the perfect retirement plan that will set your business on the path to success.

Table of Contents

Key Takeaways

• Choosing the best retirement plan for employees is important for small business owners.
• Retirement plans provide benefits for both employers and employees.
• Retirement plans help attract and retain talented employees.
• Small business owners should consult with a financial advisor to determine the best plan for their business.

Types of Retirement Plans for Small Business Owners

Consider these four retirement plans for small business owners to determine the best option for your business.

When evaluating investment options and retirement plan administration, it’s crucial to have a comprehensive understanding of each plan’s features.

The first option is a Simplified Employee Pension (SEP) IRA, which allows for tax-deductible contributions and flexible contribution limits.

Another option is a Savings Incentive Match Plan for Employees (SIMPLE) IRA, which offers ease of administration and contribution flexibility.

A solo 401(k) plan is available for self-employed individuals and offers higher contribution limits and potential for loans.

Lastly, a defined benefit plan provides a guaranteed retirement benefit and allows for larger contributions.

Each plan has unique advantages and considerations, so consulting with a financial advisor is essential to make the best choice for your business.

Key Factors to Consider When Choosing a Retirement Plan

When deciding on a retirement plan, it’s important to evaluate factors such as contribution limits, tax advantages, and ease of administration. Evaluating investment options and retirement plan administration are key considerations in choosing the best retirement plan for small business owners. To help you make an informed decision, let’s take a look at a comparison table showcasing four popular retirement plans:

Evaluating the Benefits of Each Retirement Plan Option

To understand the benefits of each retirement plan option, you should evaluate the contribution limits, tax advantages, and ease of administration.

When evaluating the advantages of employer-sponsored retirement plans and comparing the costs of different retirement plan options, consider the following:

• Contribution limits: Some plans have higher contribution limits, allowing you to save more for retirement.
• Tax advantages: Look for plans that offer tax deductions for contributions or tax-free growth on investments.
• Ease of administration: Consider the administrative requirements and fees associated with each plan.

By carefully evaluating these factors, you can choose a retirement plan that aligns with your financial goals and offers the greatest benefits for both you and your employees.

Remember to consult with a financial advisor to ensure you make an informed decision.

Understanding the Tax Implications of Retirement Plans

Understanding the tax implications of different retirement plan options can help you make informed decisions about saving for your future. When considering retirement plans, it is important to understand how taxes will impact your savings and withdrawals. To help you navigate this complex topic, let’s explore the tax implications of various retirement plan options.

Comparing Contribution Limits for Different Retirement Plans

Consider the contribution limits of various retirement plans to determine which option aligns with your savings goals. Evaluating investment options and comparing vesting schedules are crucial steps in making informed decisions about your retirement plan. Here are some key points to consider:

Traditional IRA: This plan allows individuals to contribute up to $6,000 per year, with an additional catch-up contribution of $1,000 for those aged 50 and older.

Roth IRA: With a Roth IRA, you can contribute up to $6,000 per year, or $7,000 if you are 50 or older. The main advantage is that qualified withdrawals are tax-free.

401(k): This employer-sponsored plan offers higher contribution limits, with a maximum of $19,500 per year, or $26,000 if you are 50 or older.

SEP IRA: Designed for self-employed individuals and small business owners, the SEP IRA allows contributions of up to 25% of your net self-employment income, with a maximum of $58,000.

SIMPLE IRA: This plan allows employees to contribute up to $13,500 per year, or $16,500 if you are 50 or older, while employers can make matching contributions.

Exploring the Eligibility Requirements for Retirement Plans

Explore if you meet the eligibility requirements for different retirement plans to determine the best option for your financial future.

When it comes to retirement planning, understanding the eligibility requirements is crucial. Income requirements and age restrictions are common factors that determine your eligibility for retirement plans.

For example, some plans may have income limits, while others may require you to reach a certain age before you can participate. It’s important to explore these requirements to ensure that you can take advantage of the retirement plan that suits your needs.

Additionally, understanding the different retirement plan options is essential. Comparing options like a 401(k) versus an IRA or a defined benefit plan versus a defined contribution plan allows you to make an informed decision.

How to Set Up a Retirement Plan for Your Small Business

Now that you have a clear understanding of the eligibility requirements for retirement plans, let’s delve into the process of setting up a retirement plan for your small business without the assistance of a financial advisor. While seeking professional advice is always recommended, there are benefits to exploring this option on your own.

When setting up a retirement plan for your small business without a financial advisor, consider the following:

• Research different retirement plan options available to small business owners.
• Understand the benefits of employer-sponsored retirement plans for both you and your employees.
• Determine the contribution limits and eligibility requirements of each plan.
• Familiarize yourself with the administrative responsibilities associated with managing a retirement plan.
• Utilize online resources and tools to assist you in the setup and management of your retirement plan.

The Importance of Offering Retirement Benefits to Employees

Offering retirement benefits to your employees is crucial for attracting and retaining top talent. Not only does it show that you value your employees’ future, but it also provides them with financial security and peace of mind. Retirement plans have a significant impact on small business growth as well. By providing retirement benefits, you can increase employee loyalty and satisfaction, leading to higher productivity and lower turnover rates.

Here is a table highlighting the benefits of retirement plans for employee loyalty and the impact on small business growth:

Common Pitfalls to Avoid When Choosing a Retirement Plan

Avoid these common pitfalls when deciding on a retirement plan for your employees. Evaluating retirement plan fees is crucial to ensure that you’re getting the best value for your money. Common mistakes in retirement plan administration can lead to penalties and fines, so it’s important to stay informed and avoid these errors.

Here are five common pitfalls to avoid:

Ignoring hidden fees: Take the time to evaluate all the fees associated with the retirement plan. Look for any hidden costs that could eat into your employees’ savings.

Failing to benchmark fees: Compare the fees of different retirement plans to ensure you’re getting the most competitive rates. Don’t settle for the first plan you come across.

Neglecting investment options: Look for retirement plans that offer a wide range of investment options. This will allow your employees to diversify their portfolios and maximize their returns.

Lack of employee education: Don’t underestimate the importance of educating your employees about their retirement plans. Make sure they understand the benefits and how to make the most of their investments.

Inadequate plan administration: Be proactive in managing your retirement plan. Stay updated with regulatory changes and ensure compliance to avoid penalties and legal issues.

Maximizing Retirement Savings for Small Business Owners

Maximize your savings for retirement as a small business owner by exploring different strategies and investment opportunities. As a savvy entrepreneur, it’s crucial to implement effective retirement planning strategies to secure your financial future. By maximizing retirement savings, you can ensure a comfortable lifestyle post-retirement and enjoy the fruits of your hard work.

To achieve this, consider implementing retirement planning strategies that align with your business goals and risk tolerance. These may include setting up a Simplified Employee Pension (SEP) IRA or a Self-Employed 401(k) plan. These retirement plans offer tax advantages and higher contribution limits, allowing you to save more for retirement.

Additionally, consider diversifying your investments beyond traditional retirement accounts. Explore opportunities in stocks, bonds, real estate, or even venture capital. By diversifying your portfolio, you can potentially maximize your returns and build a substantial nest egg for retirement.

Remember, it’s essential to consult with a financial advisor who specializes in retirement planning for small business owners. They can provide expert guidance tailored to your unique circumstances and help you make informed decisions.

Tips for Managing Retirement Plans as a Small Business Owner

Now that you have learned about maximizing retirement savings for small business owners, let’s dive into some tips for managing retirement plans.

As a small business owner, it is crucial to make the most of your retirement savings and ensure a secure future. Here are some valuable tips to help you navigate the world of retirement plans:

Regularly review your retirement plan: Stay updated with any changes in regulations and assess if your current plan is still the best fit for your business.

Maximize contributions: Take advantage of contribution limits to maximize your retirement savings potential.

Offer matching contributions: Consider implementing a matching contribution program to incentivize your employees to save more for their retirement.

Seek professional advice: Consult with a financial advisor who specializes in retirement plans to ensure you make informed decisions.

Educate your employees: Provide resources and workshops to educate your employees on the importance of retirement planning and maximizing their savings.

The Role of a Financial Advisor in Choosing the Best Retirement Plan

Consider consulting with a financial advisor who can guide you in selecting the optimal retirement plan for your specific needs and goals. The role of a financial advisor in choosing the best retirement plan cannot be overstated.

With their expertise and knowledge, they can provide invaluable assistance in navigating the complex world of retirement planning. A financial advisor will take into account your unique circumstances, such as your age, risk tolerance, and desired retirement lifestyle, to recommend the most suitable plan for you.

They will also consider the benefits of professional guidance, which include maximizing tax advantages, ensuring compliance with regulations, and helping you make informed investment decisions.

Exploring Solo 401(k) Plans for Self-Employed Business Owners

To get the most out of your retirement savings as a self-employed business owner, you should explore the benefits of a Solo 401(k) plan. This retirement option offers flexibility and attractive contribution limits that can help you maximize your savings potential.

Here are some key features of a Solo 401(k) plan:

Higher Contribution Limits: With a Solo 401(k), you have the potential to contribute more towards your retirement compared to other self-employed retirement options.

Flexibility: You have the ability to make both employer and employee contributions, allowing for greater control over your retirement savings.

Tax Advantages: Contributions to a Solo 401(k) are tax-deductible, reducing your taxable income and potentially lowering your overall tax liability.

Investment Options: Solo 401(k) plans typically offer a wide range of investment options, giving you the opportunity to diversify and potentially grow your retirement funds.

Easy Administration: Setting up and managing a Solo 401(k) is relatively straightforward, with minimal administrative requirements.

As a self-employed business owner, exploring the benefits of a Solo 401(k) plan can provide you with a powerful retirement savings tool that aligns with your unique needs and goals.

Simplifying Retirement Planning With SEP Iras

If you’re a self-employed business owner, SEP IRAs can simplify your retirement planning process.

SEP IRAs, or Simplified Employee Pension Individual Retirement Accounts, offer tax advantages and are designed specifically for small business owners like you.

With a SEP IRA, you can contribute a percentage of your income, up to a certain limit, into a retirement savings account. This not only helps you save for your future, but also offers potential tax benefits.

Contributions made to a SEP IRA are tax-deductible, meaning you can lower your taxable income and potentially reduce your tax liability. Additionally, any earnings and investment growth within the SEP IRA are tax-deferred until withdrawal, allowing your retirement savings to potentially grow even more.

Pros and Cons of Establishing a SIMPLE IRA for Your Business

When establishing a SIMPLE IRA for your business, it’s important to weigh the pros and cons. Consider the advantages and disadvantages of a SIMPLE IRA for small businesses. Here are some key considerations for implementing a SIMPLE IRA in your business:

Easy setup and administration: The SIMPLE IRA is known for its simplicity and ease of administration, making it a popular choice for small businesses.

Tax advantages: Contributions to a SIMPLE IRA are tax-deductible, reducing your business’s taxable income.

Employee retention: Offering a retirement plan like a SIMPLE IRA can help attract and retain talented employees by providing them with a valuable benefit.

Limited contribution limits: The contribution limits for a SIMPLE IRA are lower compared to other retirement plans, which may not be suitable for businesses with high-earning employees.

Employer match requirement: With a SIMPLE IRA, employers are required to make either a matching contribution or a non-elective contribution, adding to the cost for the business.

Considering these factors will help you make an informed decision about whether a SIMPLE IRA is the right retirement plan for your small business.

Frequently Asked Questions

How do employee training costs impact employee buy-in.

Paying for employee training can positively impact their buy-in, leading to higher employee retention and a better training ROI. Consider innovative ways to engage and motivate employees to participate in training programs.

What Are Some Effective Ways to Encourage Employee Buy-In Without Asking Them to Pay for Training?

Encourage employee buy-in without asking them to pay for training. Motivate employees through incentives like bonus opportunities, recognition programs, and career development. Show the value of training by linking it to personal growth and advancement opportunities.

How Can Companies Engage and Motivate Employees to Participate in Training Programs?

To engage and motivate employees in training programs, create a culture of continuous learning. Offer incentives like career development opportunities, recognition for completing training, and a supportive environment that encourages growth.

How Can Individuals Navigate Awkward Money Conversations in the Workplace?

Navigating workplace conversations about money etiquette can be challenging. Establish clear boundaries and expectations for financial discussions. Communicate effectively and show empathy to navigate these awkward conversations with confidence and professionalism.

What Are Some Strategies for Establishing Clear Boundaries and Expectations Regarding Financial Discussions at Work?

To establish clear boundaries and manage expectations regarding financial discussions at work, start by openly communicating the company’s policies and guidelines. Encourage employees to respect each other’s privacy and avoid discussing sensitive financial matters unless necessary.

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Start » strategy, 5 steps to prepare for small business owner retirement.

There are several steps that are crucial to take when preparing to retire, such as preparing an exit strategy and choosing a retirement plan.

Planning for retirement can be overwhelming, especially for a small business owner without a traditional employer-sponsored retirement plan; however, the earlier you start preparing for this chapter of your life, the smoother your transition is likely to be.

Here are some key retirement savings options you have as a small business owner, along with steps you should take as you plan for your retirement.

Retirement plans for small business owners

Ira-based plans.

There are two types of plans that fall into this category for small business owners: SEP IRA and SIMPLE IRA. The SEP IRA plan is for self-employed individuals or employers who have at least one employee, and the SIMPLE IRA plan is for any self-employed individuals or employers with 100 or fewer employees. The contributors and contribution amounts are different for each plan.

Self-employed 401(k)

This plan is perfect for anyone who is a self-employed business owner with no employees. It is funded by the employer, but contributions cannot exceed $58,000 in 2021. In addition, the owner cannot take money from the plan until they turn 59 and a half years old, their plan is terminated or there is another event that qualifies them to withdraw without penalty.

Investment-only account

Anyone who is self-employed can create this type of account, though the contributions are determined by the trustee. Those who have a qualified plan who want to further their investments should consider this type of account. It is best to speak to a tax advisor for plan details, contribution amounts and tax benefits.

[Read: Employee Retirement Plans: Guide for Small Businesses ]

Business owners tend to overestimate how much their business is worth, which is why conducting a business valuation is so important.

Steps for retiring as a small business owner

Determine what you want your life to look like during retirement.

Business owners who are looking to retire should consider details like where they want to live in the future, how much that will cost, what other expenses they may have and where they will get their retirement income. Creating a plan can ensure that all of these important details are arranged and nothing is missed along the way.

Choose the right retirement plan

There are a lot of retirement plans available to small business owners that are not available to employees of larger businesses. There is flexibility within each plan, including who contributes, how much is contributed, what types of assets qualify under the plans, and the dates the plans can be drawn from. Considering these and other retirement needs and consulting with a financial advisor to explore each potential plan’s terms can help small business owners see which is right for them.

Prepare a business exit strategy

In addition to planning for their lifestyle goals, small business owners should also develop a strategy for their transition into retirement . The first step is determining when they want to retire. From there, they can determine key factors such as who will take over the business, whether or not they want to sell, and how much the business is worth. These details are crucial to plan ahead so there aren’t any surprises and business owners aren’t left with less than they estimated.

[Read: How to Develop an Exit Plan for Your Business ]

Appraise the value of the business, assets, and investments

Business owners tend to overestimate how much their business is worth, which is why conducting a business valuation is so important. If a business owner is expecting a certain amount of money from selling the business to provide for any expenses after retirement, but the business sells for less, it can be difficult to make up for the gap. In addition, assets and investments should be appraised for the same reason. If the investments won’t produce the income needed, adjustments should be made.

Don’t touch retirement savings until needed

One of the most important things to know before retiring is the penalties for drawing from a retirement plan too early. Some plans will make the person pay a penalty fee to access funds, while others may cause the account to lose principal or interest . There is always a chance the person will lose tax benefits as well. Those with these accounts should avoid accessing the funds until they retire or they qualify by the plan to withdraw.

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• Retirement Planning Guide for Business Owners
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Table of Contents

A business owner must create a retirement plan for when you eventually want to retire. Knowing your retirement goals and options allows you to make smart financial decisions. Today, we will explore the basics of retirement planning for business owners.

Understanding Retirement Planning and Why It’s Important for Business Owners

Business owners have unique financial planning needs, especially regarding retirement planning. Retirement planning is critical for business owners as it helps them set financial goals and create a roadmap. Retirement planning involves various aspects, such as calculating retirement savings, estimating retirement expenses, creating a retirement budget, and identifying suitable retirement investment options. Business owners must plan and factor in business finances while planning for retirement.

Here are three reasons why retirement planning is vital for business owners:

• Securing personal and business finances for the future.
• Creating a financially secure retirement.
• Protecting the business in case of unexpected events.

Retirement planning is a comprehensive process that requires attention to detail and expert guidance for optimal results. Therefore, consulting with a financial advisor is recommended to assist business owners in planning for their retirement.

Identifying Personal and Business Goals for Retirement

Setting personal and business goals  is essential when planning for retirement as a business owner.

Personal goals could include:

• determining a  desired retirement age  and lifestyle
• calculating the  amount of retirement savings needed  to achieve those goals
• considering factors like  healthcare costs .

Business goals for retirement may include:

• identifying a successor
• determining the business’s overall value
• choosing between  legacy planning or selling the company outright.

By identifying and setting clear goals before retirement, business owners can make informed decisions about their financial future, safeguard their assets and ensure a smooth business transition. It is highly recommended to consult a financial advisor who can provide guidance and expertise to help identify goals, create a roadmap and execute a solid retirement plan for personal and business objectives.

Evaluating Current Financial Situation and Retirement Needs

For business owners, evaluating their current financial situation and retirement needs is crucial in developing a comprehensive retirement plan. Here are the key steps to evaluate your current financial situation and plan for retirement needs:

• Analyze your financial situation:  Audit your current cash flow and expenses, evaluate your investments, and calculate your net worth.
• Determine your retirement needs:  Assess your anticipated retirement age, lifestyle expenses, medical expenses, and other costs such as travel and entertainment.
• Develop a retirement plan:  Create a plan to achieve your retirement goals, including funding retirement accounts, optimizing Social Security benefits, and investing in long-term growth assets.
• Review and adjust:  Review and adjust your plan regularly based on changes in your circumstances or business conditions.

By following these steps, business owners can develop a comprehensive retirement plan that facilitates a comfortable retirement lifestyle.

Pro Tip:  Seek help from a financial advisor to create a comprehensive retirement plan to ensure a comfortable retirement.

Retirement Plan Options for Business Owners

As a business owner,  retirement planning can be an intimidating process. First, you must know the options available and what will fit your situation best. This guide will review the different retirement plans for business owners and their benefits and drawbacks. From there, you can decide which one is right for you!

Traditional 401(k) Plans

A traditional 401(k) plan is a tax-advantaged retirement savings plan that offers many benefits to employers and employees. As a business owner, offering your employees a traditional 401(k) plan can effectively save for retirement, attract and retain top talent, and lower your taxable income.

Here are some key features of a traditional 401(k) plan:

• Pre-tax contributions:  Employees can make pre-tax contributions to their 401(k), which reduces their taxable income and allows their retirement savings to grow tax-free until they withdraw them.
• Matching contributions:  Employers can choose to match a portion of their employees’ 401(k) contributions up to a certain amount or percentage.
• Vesting:  Employers can set up vesting schedules that dictate how much of their contributions employees can keep if they leave the company before a certain amount of time.
• Contribution limits:  The IRS sets annual contribution limits for 401(k) plans, which can be adjusted for inflation.

Offering a traditional 401(k) plan can be a valuable part of your overall retirement planning strategy as a business owner.

Solo 401(k) Plans

A  Solo 401(k)  plan is an attractive retirement savings option for self-employed business owners and their spouses. This plan offers attractive tax benefits, high contribution limits, and flexibility in investment options.

Here are some of the benefits of a Solo 401(k) plan:

• Pre-tax Contributions:  You can contribute to your Solo 401(k) before taxes, minimizing your current tax liability.
• High Limits:  You can contribute up to  $58,000  to your Solo 401(k) account in 2021, including catch-up contributions for those aged 50 and older.
• Flexibility:  You can choose from various investment options such as stocks, bonds, mutual funds, and real estate.
• Easy Administration:  Solo 401(k) plans are easy to set up, maintain, and administer.

Additionally, a Solo 401(k) can help business owners to achieve their retirement goals, build wealth and reduce their taxable income. It is a powerful tool for financial planning, making it an excellent option for business owners looking for a comprehensive retirement plan.

Simplified Employee Pension (SEP) Plans

A  Simplified Employee Pension (SEP) plan  is a retirement plan option for small business owners that is easy to set up and maintain while offering tax advantages for employers and employees. Here are the main features of a SEP plan:

• Employers make tax-deductible contributions to their employees’ retirement accounts (up to  25% of their compensation or $58,000 for 2021,  whichever is less).
• Employees do not pay taxes on the contributions until they withdraw them.
• The plan is easy to set up and maintain, requiring no annual filings.
• All employees with at least  $600  in compensation for the year must be eligible for the plan.
• SEP plans can be a great option for small businesses looking for a hassle-free retirement plan with tax benefits for employers and employees.

Savings Incentive Match Plan for Employees (SIMPLE) Plans

The  Savings Incentive Match Plan for Employees , or  SIMPLE plan , is a retirement savings option available to business owners and their employees. SIMPLE plans offer many benefits, including tax-deductible contributions and ease of administration.

Here’s what business owners need to know about SIMPLE plans:

• Employees can contribute a portion of their salary to the plan on a pre-tax basis up to a certain limit.
• Employers must make either matching or non-elective contributions to the plan.
• SIMPLE plans have lower contribution limits than other types of retirement plans.
• SIMPLE plans also have fewer administrative requirements and lower costs than other retirement plans, making them a popular choice for small businesses.

Consider talking to a financial advisor to determine if a SIMPLE plan is your business’s right retirement savings option.

Defined Benefit Plans

Defined Benefit Plans  are a type of retirement plan that provides a fixed, pre-established benefit for employees upon retirement. These plans are suited for business owners who wish to offer a guaranteed benefit to their employees, regardless of market fluctuations or investment performance.

Here are some  critical characteristics  of defined benefit plans:

• The employer, not the employee, makes contributions
• The employer is responsible for ensuring that the plan is sufficiently funded to meet future obligations
• Employees are not typically allowed to contribute to the plan
• Benefits are usually determined by a formula based on years of service and salary history

Suppose you are a business owner considering a defined benefit plan. In that case, working with a financial advisor to understand the costs and obligations involved and any regulatory and compliance requirements is essential.

Choosing the Right Retirement Plan for Your Business

Regarding retirement planning for business owners,  there is no one-size-fits-all solution. The right retirement plan for your business will depend on factors like the type of business, the number of employees, and the business’s long-term goals. This guide will help you navigate the various options available and choose a retirement plan that meets your business needs.

Analyzing the Pros and Cons of Each Retirement Plan Option

Choosing the right retirement plan for your business is crucial for future financial stability, and understanding the pros and cons of each option is necessary. Here are three options to consider:

• 401(k) Plan: The most popular retirement plan for businesses, employees can contribute to a tax-advantaged account. The pros include the possibility of employer matching, high contribution limits, and flexible vesting schedules. The cons include higher administrative fees and complex compliance requirements.
• SEP IRA:  A Simplified Employee Pension IRA lets employers contribute to employee retirement accounts. Pros include high contribution limits, low setup and administrative fees, and flexible employer contributions. The cons include the inability of employees to contribute and the possibility of limited vesting schedules.
• SIMPLE IRA: Savings Incentive Match Plan for Employees IRA functions similarly to a 401(k) plan with lower contribution limits but lower administrative fees. Pros include the possibility of employer matching, lower administrative costs, and simple compliance requirements. Cons include lower contribution limits and less flexibility.

Ultimately, the best plan option will depend on the employer’s financial goals, business type, and overall employee structure.

Considering the Scale of the Business

Choosing the right retirement plan for your business depends on several factors, including the size, the number of employees, and the financial goals of business owners. Here are some of the most popular types of retirement plans to consider:

• Simplified Employee Pension Plan (SEP IRA) : This plan is ideal for sole proprietors or small business owners with a few employees. Employers contribute to their employees’ accounts, and the contributions are tax-deductible.
• 401(k) Plan : This plan is ideal for larger businesses or those with more employees. Employers and employees can contribute to the account, and the contributions are tax-deductible.
• SIMPLE IRA Plan : This plan is similar to a 401(k) plan but is designed for small businesses with up to 100 employees. Employers and employees can contribute to the account, and the contributions are tax-deductible.
• Defined Benefit Plan : This plan is ideal for businesses with high-income earning owner or owners. Employers must make annual contributions to their employees’ retirement accounts, which are tax-deductible.

It’s important to consult with a financial advisor to determine which plan best fits your business’s specific needs and goals.

Consulting with Financial and Tax Professionals

Retirement planning for business owners  can be daunting, but consulting with financial and tax professionals can provide the guidance you need to choose the right retirement plan for your business.

Here’s  how financial and tax professionals can help:

• Financial professionals  can assist you with determining which retirement plan is a good fit for you and your business. They can consider the size of your business, the number of employees you have, and your financial goals.
• Tax professionals  can help you understand and navigate the tax implications of different retirement plans. They can also help you maximize your tax benefits and minimize your liabilities.

By working with financial and tax professionals, you can make informed decisions about your retirement plan and feel confident that your retirement goals are in sight. Remember that retirement planning is an ongoing process, and it’s always a good idea to check in with your advisors periodically to ensure your plan is current.

Pro tip:  Don’t wait until it’s too late to start planning for retirement. The earlier you start, the more time you’ll have to save and grow your retirement funds.

Implementing a Retirement Plan for Your Business

When it comes to retirement planning for business owners, implementing an appropriate plan is crucial for the business and the employees. Therefore, it is important to understand the different types of retirement plans available and how they can help you achieve your long-term savings goals. This guide will cover the most popular retirement plans for business owners and how to choose the right one for your business.

Establishing the Plan and Necessary Paperwork

Before implementing a retirement plan for your business, it is essential to establish a clear strategy and complete the necessary paperwork. Here are the steps to follow when setting up a retirement plan for your business:

• Establish Your Goals and Determine Your Budget: The first step in implementing a retirement plan is establishing your goals, such as attracting and retaining employees, reducing taxes, and creating a benefit for yourself as an owner. You must also determine your budget and how much you can contribute to the plan.
• Choose a Retirement Plan:  Your business size and structure dictate the type of retirement plan you can choose. Popular options are  401(k)s, SEPs, and Simple IRAs . Choosing a plan that benefits both you and your employees is essential.
• Complete the Necessary Paperwork:  Once you’ve chosen a retirement plan, complete the necessary paperwork. You must file  Form 5500  annually and ensure all contributions are deposited on time. You may also need to inform your employees about the plan and their options.

Setting up a retirement plan for your business can seem daunting, but following these steps can help ensure a smooth implementation.

Communicating the Plan to Employees

Implementing a retirement plan for your business is an essential long-term investment that requires effective communication between the employer and the employees. Here are some tips for communicating the plan to your employees:

• Hold a meeting  with your employees and explain the plan’s details in simple terms, including the different types of retirement plans available and the benefits of each.
• Provide written materials , such as brochures or handouts, and ensure they are easily accessible for all employees.
• Offer one-on-one consultations with financial advisors to help employees understand the plan better.
• Use various modes of communication  to ensure all employees are aware of the plan and its benefits, such as internal memos, company newsletters, and emails.

Pro tip:  Be transparent about the plan’s cost and how it will be funded. Also, encourage feedback and answer any questions that employees may have.

Monitoring the Plan’s Performance

Tracking the performance of your retirement plan and making necessary adjustments can ensure that your business is offering the best retirement benefits for your employees. Here are some ways to monitor and adjust your plan:

• Track participation rates : Regularly evaluate employee participation rates to identify potential issues or improvement areas. If employees aren’t contributing as much as expected, review the plan’s features and benefits to see if changes could encourage more participation.
• Review investment options : Review your plan’s investment options periodically to ensure they are diversified and appropriate for your employees’ retirement goals. Consider adding new investment options or removing underperforming ones as needed.
• Assess fees and costs : Review your plan’s administrative and investment costs to ensure they are reasonable and aligned with industry standards. You want to offer your employees competitive benefits without sacrificing your bottom line.
• Meet with your plan provider : Schedule regular meetings with your plan provider to discuss performance and discuss potential adjustments. They can provide guidance and support to help you optimize your plan’s performance.

Retirement Planning Mistakes to Avoid

Retirement planning for business owners can be tricky as there are many things to consider when creating a financial plan. It is important to be informed and strategic to ensure you take the proper steps toward retirement. To help you, we have put together a list of the most common retirement planning mistakes to avoid :

Failing to Plan Early Enough

Failing to plan early enough for your retirement is one of the most costly mistakes business owners can make. Early retirement planning can help you build a robust retirement portfolio and make your golden years comfortable. Some retirement planning guides for business owners to avoid this mistake are –

• Start saving for retirement as early as possible .
• Determine your goals and seek professional guidance .
• Create a diverse investment portfolio .
• Avoid withdrawal of funds before retirement .
• Keep reviewing and adjusting  your retirement plan regularly.

Remember, early and systematic efforts can ensure a financially secure retirement.

Pro tip: Start by setting up automatic deposits into retirement accounts. It can help ensure consistent contributions towards your retirement savings.

Not Taking Advantage of Tax Benefits

One of the most common retirement planning mistakes business owners make is not taking advantage of the tax benefits available to them. The following are some of the tax benefits business owners should consider:

• Simplified Employee Pension (SEP) Plan:  Business owners can contribute up to 25% of their net earnings (up to $58,000) into a tax-deferred retirement account.
• Solo 401(k) Plan:  This plan allows business owners to contribute up to $57,000 (or $63,500 if over 50 years old) annually, with the benefit of profit-sharing contributions.
• Defined Benefit Plan:  This plan is ideal for business owners who want to contribute significant money to their retirement accounts while lowering their taxable income.  It also allows for contribution limits higher than other retirement plans.

Taking advantage of these tax benefits can help business owners build their retirement nest egg faster while potentially lowering their tax bill.

Not Diversifying Investments within the Plan

One common retirement planning mistake for business owners is not diversifying their investments within the plan, which can lead to suboptimal returns, increased risk, and reduced financial security in retirement.

Here’s why it’s essential to diversify your retirement investments:

• Minimize risk:  Diversification helps minimize risk by spreading your investments across different asset classes, such as stocks, bonds, or real estate, that are less likely to be affected by economic events or market fluctuations.
• Improve returns:  Diversification across different asset classes can enhance returns, reduce volatility and increase the likelihood of achieving your retirement goals.
• Meet your retirement needs:  It is important to consider your risk tolerance, age, income needs, and future financial obligations while diversifying your retirement investments.

Regularly review your retirement plan and adjust your investments to keep up with changing economic and financial conditions.  Pro Tip-  A financial advisor can help you determine the appropriate asset allocation and diversification strategies that align with your retirement goals.

Ignoring Plan Fees and Expenses

Ignoring plan fees and expenses is among the most common retirement planning mistakes business owners make, which could significantly impact their retirement savings.

It is essential to know that every retirement plan comes with fees and expenses – some are visible, while others are hidden. These fees could range from administrative fees to investment expenses, and understanding them is vital to ensure that the plan is cost-effective.

Here are a few ways to avoid these retirement planning mistakes:

• Read the plan document thoroughly and pay attention to the fee section.
• Review the fees and expenses regularly and consider switching to another provider if the fees are too high.
• Work with a financial planner who will help you choose low-cost investments and minimize fees.

In the long run, keeping an eye on plan fees and expenses will help you maximize your retirement savings and achieve your retirement goals.

Failing to Review and Update the Retirement Plan

One of business owners’ biggest mistakes regarding retirement planning is failing to review and update their plans regularly. It can lead to a significant gap between retirement expectations and reality. With changes in market trends, inflation rates, personal goals, and finances over time, it is essential to make necessary adjustments to ensure a comfortable retirement.

To avoid this mistake:

• Plan to review and update your retirement plan every year.
• Make necessary adjustments based on your current financial situation, and project your expected income and expenses for retirement.
• Keep track of different retirement investment options and ensure they align with your goals and financial standing.

Regularly communicating with your financial advisor can help you stay on track and make informed decisions about your retirement plan.

Pro tip:  Reviewing and updating your retirement plan regularly can help you reach your retirement goals and live a comfortable life after retirement.

Frequently Asked Questions

1. What is retirement planning for business owners?

Retirement planning for business owners is preparing for a financially secure retirement by setting aside funds from their business and personal savings, investing in retirement accounts, and developing a retirement income strategy.

2. Why is retirement planning important for business owners?

Retirement planning is vital for business owners because they often rely on selling their businesses as a source of retirement income. Without proper planning, they may not have enough savings to support their lifestyle and expenses in retirement.

3. What retirement accounts are available for business owners?

Business owners can choose from a variety of retirement accounts, including 401(k)s, Simplified Employee Pension (SEP) plans, Savings Incentive Match Plan for Employees (SIMPLE) plans, and Individual Retirement Accounts (IRAs).

4. How much should business owners save for retirement?

Business owners should save as much as possible for retirement, but a general rule of thumb is to save at least 15% of their annual income. However, the amount may vary depending on their financial goals and lifestyle needs.

5. When should business owners start planning for retirement?

Business owners should start planning for retirement as soon as they start their businesses. The earlier they start saving and investing in retirement accounts, the more time they have to grow their assets and earnings.

6. How can business owners develop a retirement income strategy?

Business owners can develop a retirement income strategy by determining their retirement goals, estimating their retirement expenses, assessing their sources of retirement income, and developing an investment plan that aligns with their risk tolerance and income needs.

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Top 4 retirement plan options for small business owners

Here are the four small business retirement plans to be aware of and how they work.

Get your Financial Wellness Score by taking  this free 5 minute quiz .

• January 17th, 2024
• 7 minute read

Key takeaways

• As a small business owner, a small business retirement plan can help you supercharge your retirement savings, lower your taxes, and even attract and retain top talent
• The right plan for your business depends on your personal goals, your business goals, number of employees, and your ability to save
• Every retirement plan has unique advantages and disadvantages including contribution limits, investment options, plan costs, and reporting requirements
• It’s important to periodically review your plan and to make adjustments to ensure it still meets your personal and business goals as they evolve over time

As a small business owner, you already know what it’s like to be responsible for making important business decisions every day. You have made the choice to be in control of your career, income, and future. One thing that nearly all small business owners have in common is the desire for professional and financial independence.

A small business retirement plan can be a very powerful tool to help you build wealth, reduce and manage taxes, and possibly grow your business.

Here are the four small business retirement plans you need to be aware of, how they work, and which one may be right for you and your business.

Reasons for establishing a retirement plan as a small business owner

Creating financial independence requires a well-informed and evolving strategy that can adapt to your personal circumstances and your changing business needs. As a small business owner, you are in control of creating wealth for you and your family and that requires a retirement planning strategy to save for the future. A small business retirement plan can be a great tool with many advantages including:

• Tax savings for your business
• Tax savings for you personally
• The ability to supercharge your retirement savings
• Tax-free growth of plan investments
• The ability to attract and retain good employees

With all of its benefits, a retirement plan can unlock potential for your money and your business. 

A SEP IRA (or Simplified Employee Pension IRA) is a retirement plan designed for individuals that are either self-employed or that own a small business with a few employees. For reasons mentioned below, a SEP IRA may not be ideal for businesses that have many employees eligible to participate in a retirement plan.

• Simple to set up and manage: SEP IRAs require very little paperwork to set up and there are no ongoing filing or reporting requirements with the IRS. Simply file a form to set up the plan, open an account with a financial institution (each participant will need their own account), contribute, and choose your investments.
• Investment flexibility: You can open a SEP IRA at most financial institutions which means you can have access to a very wide array of investment options from stocks to mutual funds to exchange-traded funds (ETFs) .
• Contribution flexibility: There is no requirement for a business to make annual contributions so you can choose whether you want to contribute based on how your business performs.

Disadvantages

• The employer makes all contributions: SEP IRAs do not allow employees to contribute to the plan. The business makes 100% of the retirement plan contributions. If you make a contribution for one eligible employee, you have to make a contribution for all eligible employees.
• Contributions vest immediately: Some retirement plans have a vesting period which means employees must remain at the company for a number of years before employer contributions become theirs. With a SEP IRA, all contributions are fully vested when they are made. If an employee works for a short period of time and then leaves, they may still get to keep their contributions.
• No catch-up contributions: Other retirement plans allow participants that are over 50 years of age to contribute $69,000 per year plus an extra $7,500 “catch-up” when they reach 50. SEP IRAs do not allow for catch-up contributions like a traditional IRA does, and are capped at $69,000.
• No Roth contributions: Businesses cannot make Roth (or after-tax contributions) to a SEP IRA. All contributions must be made on a before-tax basis which limits your ability to manage your taxes over time.

Contribution limits and deadlines

The maximum employer contribution is limited to the lesser of (1) 25% of total compensation (or 20% of net earnings from self-employment), or (2 )$69,000 per participant per year. All contributions must be made by the company’s tax filing deadline, including extensions.

Who should open a SEP IRA?

A SEP IRA can be a great solution for self-employed individuals or business owners with only a few employees. It’s also a great fit if you want an easy way to maintain a retirement plan with minimal annual reporting requirements. 

However, because the business makes all contributions to the plan it can be more expensive than other options and because you cannot make Roth contributions, tax planning opportunities are limited.

A SIMPLE IRA (or Savings Incentive Match Plan for Employees) is a step up from a SEP IRA in that it allows both employers and employees to contribute to the plan. 

Employees can elect to save, or defer, part of their salary and employers can match those contributions up to a certain limit. These plans can be established by small businesses with up to 100 employees.

• Ease of set-up: A SIMPLE IRA requires a little more work than a SEP IRA, but it is still easier to set up than a traditional 401(k) or defined benefit plan. There are required annual notices and meetings for your company and employees, but there are no major IRS reporting requirements.
• Employees can make contributions: Employees are allowed to contribute a portion of their salary to the plan. It’s a great way to get employees actively engaged in saving and planning for their retirement.
• Employers can match employee contributions: Unlike a SEP IRA, you aren’t on the hook for 100% of contributions. Your employees contribute their own money to the SIMPLE IRA plan, and you match those contributions up to a certain percentage of their total compensation.
• Higher withdrawal penalties: Most retirement plans impose a 10% penalty on withdrawals made before the age of 59 ½. With a SIMPLE IRA, if you pull money out within two years of signing up for the plan, you could pay a penalty of 25% . The 10% penalty still applies after two years assuming you are younger than 59 ½. 
• No Roth contributions: A SIMPLE IRA does not allow for Roth contributions so all money put into a participant’s account, from you or the employee, must be on a before-tax basis.
• Mandatory matching contributions: If your employees contribute to their accounts, you are required to match their contributions. All contributions you make on behalf of the business are 100% vested as soon as they are made.
• Lower contribution limits: Relative to other plans, the maximum allowable contribution for any given year is lower so it may not be a great fit if you are looking to maximize your retirement savings.

For participants under 50, the SIMPLE IRA annual contribution limit is $16,000 for 2024. For participants over 50, the catch-up contribution limit is $3,500 for a total of $19,500. These limits are for employee contributions only and do not include matching contributions. 

When it comes to the employer contributions, you can make either a 3% matching contribution or a 2% non-elective contribution. A non-elective contribution means you have to make a 2% contribution to all eligible employees even if they do not contribute on their own.

Who should establish a SIMPLE IRA?

SIMPLE IRAs are great solutions for small businesses that have more than a few employees and that aren’t ready to commit to the high costs and administrative hassle of a 401(k) but still want to allow employees to contribute to a retirement plan. Even if your goal is to eventually set up a 401(k) plan for your business, the SIMPLE IRA can be a great solution until you are ready to make the larger commitment.

Solo 401(k)

Solo 401(k)s were designed for businesses with no employees other than the business owner or the business owner and their spouse. They allow for both the business owner to contribute a portion of their salary and for the business to make a matching or profit sharing contribution to the plan. It allows for higher contribution limits without the stringent reporting requirements of a more traditional 401(k).

• Easier to maximize plan contributions: A solo 401(k) may allow business owners to maximize plan contributions at lower income levels. For example, if you made $100,000 in a given year, you could only contribute $25,000 to a SEP IRA (25% of $100,000) but you could potentially contribute $23,000 of your own money (if under 50) plus an additional $25,000 of employer money (25% of $100,000) for a total of $48,000 to a solo 401(k).
• Ease of administration: Unlike traditional 401(k) plans, solo 401(k)s are not subject to testing requirements which are designed to ensure employees receive equitable benefits under the plan. Since there are no other employees, the testing is unnecessary. There may be an annual filing requirement once the plan reaches $250,000 in assets, but it’s still a relatively simple process to complete.
• Roth contributions are allowed: Unlike with SEPs and SIMPLEs, you can make Roth contributions to your solo 401(k) account. This gives you greater flexibility to manage your taxes as your business income fluctuates and as tax policy changes over time.
• After-tax contributions are allowed: If the plan is designed properly, you can make after-tax contributions to the plan and eventually roll them over within the same plan to a Roth account or to a separate Roth IRA . This is known as a mega backdoor Roth IRA strategy. Currently, Congress is considering eliminating this option so you need to stay up to date with legislative changes.
• Susceptible to legislative changes: While annual reporting requirements are fairly light, there is always a chance that retirement plan legislation changes over time. It’s important to stay on top of any legislative changes and adjust your plan and plan documents accordingly.
• It can’t grow with your business: If you hire an employee and they are eligible for a retirement plan, you cannot keep your solo 401(k). You will have to set up a new plan for your business and move your plan assets to another account.

Contribution limits and deadlines  

For 2024, Solo 401(k) participant contributions are limited to the lesser of (1) 100% of compensation, or (2) $23,000 for those under 50 and $30,500 for those 50 or older. Employers can contribute an additional $46,000, via matching or profit share contributions. Total contributions, including both employee and employer, are limited to $69,000 for those under 50 and $76,500 for workers 50 or older. Employee contributions must be made by the end of the tax year (12/31). Employer contributions can be made up to the business tax filing deadline, with extensions.

Who should establish a Solo 401(k)?

Businesses that have no employees other than the owner (and a spouse) are eligible to set up a solo 401(k). If the business owner is capable of saving more than would be possible under other retirement plans, a solo 401(k) could be a great choice to maximize retirement savings.

Traditional 401(k)

A traditional 401(k) is often associated with much larger companies like Walmart, Amazon, and others. However, a 401(k) can still be a great plan for small businesses if you have the revenue and income to support higher contributions, are comfortable with higher administrative costs, and are committed to making larger contributions.

• Flexible plan design: 401(k)s allow you to customize your retirement plan to achieve specific retirement savings and business goals. You can elect to make a matching contribution for your employees, contribute based on the profit of your business, or both.
• Employee contributions are allowed: Employees may elect to save, or defer, a portion of their salary into the plan. 401(k)s also let you contribute more to the plan at lower income levels than SEP or SIMPLE IRAs.
• Loans are available: This can be seen as an advantage and a disadvantage, but the fact remains that 401(k)s can allow for plan loans and access to your money (that must always be repaid). It’s generally not advisable to take a loan from a 401(k) , but the option does exist.
• After-tax contributions are allowed: If the plan is designed properly, you can make after-tax contributions to the plan and eventually roll them over within the same plan to a Roth account or to a separate Roth IRA. This is known as a mega backdoor Roth strategy . 
• Complexity and cost: 401(k)s require a lot of paperwork, plan design, and administrative upkeep. In most cases, it makes sense to hire a third party plan administrator to handle the reporting and accounting requirements. All of this adds to greater plan complexity and cost.
• Testing rules: 401(k)s are subject to annual testing requirements to ensure that businesses are contributing fairly to all employees regardless of their income. As a result, contributions for highly compensated employees (including owners) may be limited to ensure more equitable distribution of retirement plan assets.
• Limited investment options: Depending on how you set up the 401(k), you may have to select from a limited number of investment options. You may be able to choose what is available, but it will still be more restrictive than a traditional brokerage account that can give you access to thousands of stocks, mutual funds, and exchange-traded funds (ETFs).

For 2024, participant contributions are limited to the lesser of (1) 100% of compensation, or (2) $23,000 for those under 50 and $30,500 for those 50 or older. Employers can contribute an additional $46,000, via matching or profit share contributions, regardless of the age of the employee contributing. Total contributions, including both employee and employer, are limited to $69,000 for those under 50 and $76,500 for workers 50 or older. Employee contributions must be made by the end of the tax year (12/31). Employer contributions can be made up to the business tax filing deadline, with extensions.

Who should establish a traditional 401(k)?

These plans are typically reserved for larger organizations with many employees. However, they can make sense for small businesses that have at least one or more employees, consistent and recurring revenue, and the ability to make significant contributions. 

A traditional 401(k) plan is a level up from both SEPs and SIMPLEs for business owners that want to maximize their retirement savings.

Choosing the right retirement plan for your small business is a big decision. The right plan for your business will depend on your personal financial goals, the size of your business and number of employees, the predictability of your business income, your ability to consistently contribute, and your desire to support your employees with their retirement savings.

While it’s an important decision to make, you can always change your retirement planning strategy in the future to meet your evolving needs which is why it’s important to consistently review your personal financial plan and your plan for your business. With a dynamic strategy, you can make a smart, informed decision for your business, supercharge your retirement savings, and put yourself one step closer to financial independence.

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• Business Tips

How to Create a Business Owner Retirement Plan

• May 6, 2022

Most resources for business owners focus on getting started and growing your business . But just as much as you need to think about how to make your business a success, you also need to think about your future without it. Have you thought about your own business owner retirement plan, and how you might earn money from your business after you’re done running it?

If you haven’t started planning for your retirement as a business owner, you’re not alone. According to a study by SCORE , 34% of small business owners don’t have a retirement savings plan. It’s not too late to start your retirement planning. Get started today with the advice and tips below.

Business owner retirement plans: The challenges

When you work for a set salary you’re able to set a goal and use your predictable monthly income to work toward it. When you own a business, you’re working toward that same goal but with a variable income. You’re also balancing this against the business’s cash needs to sustain operations.

This is all part of the operating cycle, or cash converting cycle , and it’s a big challenge in creating your retirement plan as a business owner.

For example, let’s say you own a fashion business. You might take some orders today and pay for production, wait three months for the finished goods, deliver to your customers, and wait another three months to get paid. In this scenario, you need enough cash to sustain your business for six months while waiting to get paid.

Working with this type of operating cycle can be a challenge. How can you make regular monthly contributions to a retirement fund when there is uncertainty about cash in your business?

Create a savings fund in your business

The first major step in creating a stable savings plan for your retirement is to separate funds within your business. If you haven’t already, open a business savings account .

Most of the money that will go toward your retirement will come out of your business as a distribution or dividend . Before you do that though, you need to properly manage your business’s cash. If you keep funds earmarked for retirement in your general business checking account, they can easily be spent through debit and credit card purchases.

Establish a rule for the percentage of every sale deposit to be transferred from your checking account into your savings account, keeping in mind your retirement goals. To come up with this percentage you’ll have to think about your business’s margins and operating cycle. Once it’s been set, stick to it, and make sure that transfer is made with every sale deposit.

Once you’ve started transferring funds into a business savings account, you can establish a distribution schedule. Sticking to a distribution schedule means you’re accountable for a certain number of distributions each month. The only funds you can take from your business come out of this distribution.

Choosing a small business retirement plan

There are two major types of retirement plans for small businesses. These are the Saving Incentive Match Plan for Employees (SIMPLE) and the Simplified Employee Pension (SEP) plans.

All major brokerages and banks in the U.S. can help you set up these retirement plans, and both are easy to administer. Both plans act just like an IRA for the person that’s receiving the benefits. They protect capital gains from taxes until you withdraw the funds from the account, allowing your earnings to grow at a faster rate.

The benefits for the business are even greater. Without a retirement fund, when you take distributions from your business they aren’t counted as an eligible business expense. This keeps those distributions as part of the taxable income of your business.

When you create a SIMPLE or SEP, the contributions that your business makes to these retirement funds are treated as an eligible expense (up to the annual contribution limit). For a SEP, the annual contribution limit is 20% of your business’s net profits, or $61,000 in 2022. For a SIMPLE it’s up to $14,000. These are substantial tax deductions. Of course, you won’t be able to access these funds until retirement unless you pay a penalty.

Selling your business

When you retire you’ll need to decide if you also want to sell your business. This is a major decision so it’s important to do your research.

Not every business model is suitable to sell. For example, consulting businesses and restaurants can make great profits during their lifetime, but it’s difficult to find a buyer when the business is up for sale. In contrast, product brands and technology businesses might make relatively small profits during their lifetime but sell for a substantial amount of money when the business owners decide to exit.

Two things you need to think about if you want to sell your business are continuity and intellectual property .

Continuity: Your business has continuity potential if your profits are stable in the long-term and if it can survive without the original owners. If these conditions are met, then the business may be attractive to buyers.

Intellectual property: If your business has a well-established brand name or a patented process, then it has valuable intellectual property. Buyers will see it as an asset that they may want to add to their own.

If you work towards building continuity or intellectual property into your business then a sale might be a worthy opportunity for you. Speak with a lawyer and an accountant to develop a value and a strategy for marketing the business if you choose to sell it.

It’s important to set expectations about selling your business. A smooth transition means slowly handing over responsibilities to the new ownership, and slowly being bought out. It doesn’t all happen overnight. You’ll also need to consider taxes. There are capital gains taxes, bulk sale taxes, and other income taxes that are affected by selling a business. A good accountant can help you manage these costs.

Start your business owner retirement plan today

Now that you know your options for retirement planning, you can start the process of mapping out your future beyond business ownership. Be sure to meet with your lawyer and accountant to make sure all aspects of your business owner retirement plan are covered.

If you need some working capital to cover your business’s needs while you set up a savings plan, talk to Pursuit ! We offer more than 15 different loan programs that can support your working capital needs and more.

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Future Developments

What this publication covers.

SIMPLE plans.

Qualified plans.

What this publication doesn’t cover.

Comments and suggestions.

Getting answers to your tax questions.

Getting tax forms, instructions, and publications.

Ordering forms and publications.

Tax questions.

Annual additions.

Annual benefits.

Common-law employee.

Compensation.

Other options.

Contribution.

Earned income.

Elective deferral.

Highly compensated employee.

Leased employee.

Net earnings from self-employment.

Qualified plan.

Participant.

Self-employed individual.

Sole proprietor.

• Topics - This chapter discusses:
• Useful Items - You may want to see:

Eligible employee.

Excludable employees.

Formal written agreement.

When not to use Form 5305-SEP.

Information you must give to employees.

Setting up the employee's SEP-IRA.

Deadline for setting up a SEP.

Time limit for making contributions.

Contributions for yourself.

Annual compensation limit.

More than one plan.

Tax treatment of excess contributions.

Reporting on Form W-2.

Deduction Limit for Contributions for Participants

Deduction limit for self-employed individuals.

Excise tax.

When To Deduct Contributions

Where to deduct contributions.

Who can have a SARSEP?

SARSEP ADP test.

Deferral percentage.

Employee compensation.

Compensation of self-employed individuals.

Choice not to treat deferrals as compensation.

Catch-up contributions.

Overall limit on SEP contributions.

Figuring the elective deferral.

Excess deferrals.

Excess SEP contributions.

Distributions (Withdrawals)

Prohibited transaction.

Effects on employee.

Reporting and Disclosure Requirements

Employee limit.

Grace period for employers who cease to meet the 100-employee limit.

Other qualified plan.

Other uses of the forms.

Deadline for setting up a SIMPLE IRA plan.

Setting up a SIMPLE IRA.

Deadline for setting up a SIMPLE IRA.

Election period.

Salary reduction contributions.

Employer matching contributions.

Lower percentage.

Nonelective contributions.

Time limits for contributing funds.

More information.

More Information on SIMPLE IRA Plans

Employee notification.

Note on forms.

Profit-sharing plan.

Money purchase pension plan.

Defined Benefit Plan

Plan assets must not be diverted.

Minimum coverage requirement must be met.

Contributions or benefits must not discriminate.

Contributions and benefits must not be more than certain limits.

Minimum vesting standard must be met.

Participation.

Benefit payment must begin when required.

Early retirement.

Required minimum distributions (RMDs).

Survivor benefits.

Loan secured by benefits.

Waiver of survivor benefits.

Involuntary cash-out of benefits not more than dollar limit.

Consolidation, merger, or transfer of assets or liabilities.

Benefits must not be assigned or alienated.

Exception for certain loans.

Exception for a qualified domestic relations order (QDRO).

No benefit reduction for social security increases.

Elective deferrals must be limited.

Top-heavy plan requirements.

SIMPLE and safe harbor 401(k) plan exception.

Set-up deadline.

Written plan requirement.

IRS pre-approved plans.

Plan providers.

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Quarterly installments of required contributions.

Installment percentage.

Extended period for making contributions.

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Defined contribution plan.

Employee Contributions

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Defined contribution plans.

Defined benefit plans.

Table 4-1. Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted)

Carryover of excess contributions.

Special rule for self-employed individuals.

Reporting the tax.

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Matching contributions.

Employee compensation limit.

SIMPLE 401(k) plan.

Distributions.

Treatment of contributions.

Forfeiture.

Eligible automatic contribution arrangement (EACA).

Withdrawals.

Notice requirement.

Qualified automatic contribution arrangement (QACA).

Matching or nonelective contributions.

Vesting requirements.

Notice requirements.

Excess withdrawn by April 15.

Excess not withdrawn by April 15.

Reporting corrective distributions on Form 1099-R.

Tax on excess contributions of highly compensated employees.

Safe Harbor 401(k) Plan

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Publication 560 - additional material, publication 560 (2023), retirement plans for small business, (sep, simple, and qualified plans).

For use in preparing 2023 Returns

Publication 560 - Introductory Material

For the latest information about developments related to Pub. 560, such as legislation enacted after it was published, go to IRS.gov/Pub560 .

Compensation limits for 2023 and 2024. For 2023, the maximum compensation used for figuring contributions and benefits is $330,000. This limit increases to $345,000 for 2024.

Elective deferral limits for 2023 and 2024. The limit on elective deferrals, other than catch-up contributions, is $22,500 for 2023 and $23,000 for 2024. These limits apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), section 403(b) plans, and section 457(b) plans.

Defined contribution limits for 2023 and 2024. The limit on contributions, other than catch-up contributions, for a participant in a defined contribution plan is $66,000 for 2023 and increases to $69,000 for 2024.

Defined benefit limits for 2023 and 2024. The limit on annual benefits for a participant in a defined benefit plan is $265,000 for 2023 and increases to $275,000 for 2024.

SIMPLE plan salary reduction contribution limits for 2023 and 2024. The limit on salary reduction contributions, other than catch-up contributions, is $15,500 for 2023 and increases to $16,000 for 2024.

Catch-up contribution limits for 2023 and 2024. A plan can permit participants who are age 50 or over at the end of the calendar year to make catch-up contributions in addition to elective deferrals and SIMPLE plan salary reduction contributions. The catch-up contribution limit for defined contribution plans other than SIMPLE plans is $7,500 for 2023 and 2024. The catch-up contribution limit for SIMPLE plans is $3,500 for 2023 and 2024. A participant's catch-up contributions for a year can't exceed the lesser of the following amounts.

The catch-up contribution limit.

The excess of the participant's compensation over the elective deferrals that aren’t catch-up contributions.

See Catch-up contributions under Contribution Limits and Limit on Elective Deferrals in chapters 3 and 4, respectively, for more information.

Required minimum distributions (RMDs). Individuals who reach age 72 after December 31, 2022, may delay receiving their RMDs until April 1 of the year following the year in which they turn age 73. This change in the age for making these beginning RMDs applies to both IRA owners and participants in a qualified retirement plan.

Roth simplified employee pension (SEP) IRAs and Roth SIMPLE IRAs.

Plans established after end of taxable year. For 2023 and later years, a sole-proprietor with no employees can adopt a section 401(k) plan after the end of the taxable year, provided the plan is adopted by the tax filing deadline (without regard to extensions).

Increased small employer pension plan startup cost credit. The Secure 2.0 Act of Division T of the Consolidated Appropriations Act, 2023, P.L. 117-328 (SECURE 2.0 Act), provides that eligible employers with 1–50 employees are eligible for an increased small employer pension plan startup cost credit under section 45E of 100% of qualified startup costs, subject to limitation. The credit for eligible employers with 51–100 employees remains at 50% of qualified startup costs, subject to limitation. See the instructions to Form 3800 and Form 8881 for more information on the startup cost credit.

Employer contributions credit. The Secure 2.0 Act added an additional startup cost credit under section 45E available to certain eligible employers, in an amount equal to an applicable percentage of the employer’s contributions (not including an elective deferral, as defined in section 402(g)(3)) to an eligible employer plan, subject to limitation. See the instructions to Form 3800 and Form 8881 for more information on the employer contributions credit.

Small employer military spouse participation credit. The Secure 2.0 Act added a new military spouse participation credit under section 45AA available to eligible small employers who maintain defined contribution plans with specific features that benefit military spouses. See the instructions to Form 3800 and Form 8881 for more information on the military spouse participation credit.

Designated Roth nonelective contributions and designated Roth matching contributions. The Secure 2.0 Act of 2022 permits certain nonelective contributions and matching contributions that are made after December 29, 2022, to be designated as Roth contributions.

Small employer automatic enrollment credit. The Further Consolidated Appropriations Act, 2020, P.L. 116-94, added section 45T. An eligible employer may claim a tax credit if it includes an eligible automatic contribution arrangement under a qualified employer plan. The credit equals $500 per year over a 3-year period beginning with the first tax year in which it includes the automatic contribution arrangement, and may first be claimed on the employer’s return for the year 2020.

Increase in credit limitation for small employer plan startup costs. The Further Consolidated Appropriations Act, 2020, P.L. 116-94, amended section 45E. For tax years beginning after December 31, 2019, eligible employers can claim a tax credit for the first credit year and each of the 2 tax years immediately following. The credit equals 50% of qualified startup costs, up to the greater of (a) $500; or (b) the lesser of (i) $250 for each employee who is not a “highly compensated employee” eligible to participate in the employer plan, or (ii) $5,000.

The SECURE 2.0 Act further amended section 45E to increase the credit for tax years beginning after December 31, 2022. See What’s New .

See the instructions for Form 3800 and Form 8881 for more information on the small employer automatic enrollment credit and the small employer startup cost credit.

Restriction on conditions of participation. Effective for plan years beginning after December 31, 2020, a 401(k) plan can’t require, as a condition of participation, that an employee complete a period of service that extends beyond the close of the earlier of (a) 1 year of service, or (b) the first period of 3 consecutive 12‑month periods (excluding 12-month periods beginning before January 1, 2021) during each of which the employee has completed at least 500 hours of service. Effective for plan years beginning after December 31, 2024, 3 consecutive 12-month periods are reduced to 2 consecutive 12‑month periods.

Retirement savings contributions credit. Retirement plan participants (including self-employed individuals) who make contributions to their plan may qualify for the retirement savings contribution credit. The maximum contribution eligible for the credit is $2,000. To take the credit, use Form 8880, Credit for Qualified Retirement Savings Contributions. For more information on who is eligible for the credit, retirement plan contributions eligible for the credit, and how to figure the credit, see Form 8880 and its instructions or go to IRS.gov/Retirement-Plans/Plan-Participant-Employee/Retirement-Savings-Contributions-Savers-Credit .

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Introduction

This publication discusses retirement plans you can set up and maintain for yourself and your employees. In this publication, “you” refers to the employer. See chapter 1 for the definition of the term “employer” and the definitions of other terms used in this publication. This publication covers the following types of retirement plans.

SEP (simplified employee pension) plans.

SIMPLE (savings incentive match plan for employees) plans.

Qualified plans (also called H.R. 10 plans or Keogh plans when covering self-employed individuals), including 401(k) plans.

SEP, SIMPLE, and qualified plans offer you and your employees a tax-favored way to save for retirement. You can deduct contributions you make to the plan for your employees. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. You can also deduct trustees' fees if contributions to the plan don't cover them. Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan.

Under a 401(k) plan, employees can have you contribute limited amounts of their before-tax (after-tax, in the case of a qualified Roth contribution program) pay to the plan. These amounts (and the earnings on them) are generally tax free until your employees receive distributions from the plan or, in the case of a qualified distribution from a designated Roth account, completely tax free.

This publication contains the information you need to understand the following topics.

What type of plan to set up.

How to set up a plan.

How much you can contribute to a plan.

How much of your contribution is deductible.

How to treat certain distributions.

How to report information about the plan to the IRS and your employees.

Basic features of SEP, SIMPLE, and qualified plans. The key rules for SEP, SIMPLE, and qualified plans are outlined in Table 1 .

SEP plans provide a simplified method for you to make contributions to a retirement plan for yourself and your employees. Instead of setting up a profit-sharing or money purchase plan with a trust, you can adopt a SEP agreement and make contributions directly to a traditional individual retirement account or a traditional individual retirement annuity (SEP-IRA) set up for yourself and each eligible employee.

Generally, if you had 100 or fewer employees who received at least $5,000 in compensation last year, you can set up a SIMPLE IRA plan. Under a SIMPLE plan, employees can choose to make salary reduction contributions rather than receiving these amounts as part of their regular pay. In addition, you will contribute matching or nonelective contributions. The two types of SIMPLE plans are the SIMPLE IRA plan and the SIMPLE 401(k) plan.

The qualified plan rules are more complex than the SEP plan and SIMPLE plan rules. However, there are advantages to qualified plans, such as increased flexibility in designing plans and increased contribution and deduction limits in some cases.

Table 1. Key Retirement Plan Rules for 2023

Although the purpose of this publication is to provide general information about retirement plans you can set up for your employees, it doesn't contain all the rules and exceptions that apply to these plans. You may need professional help and guidance.

Also, this publication doesn't cover all the rules that may be of interest to employees. For example, it doesn't cover the following topics.

The comprehensive IRA rules an employee needs to know. These rules are covered in Pub. 590-A, Contributions to Individual Retirement Arrangements (IRAs), and Pub. 590-B, Distributions from Individual Retirement Arrangements (IRAs).

The comprehensive rules that apply to distributions from retirement plans. These rules are covered in Pub. 575, Pension and Annuity Income.

The comprehensive rules that apply to section 403(b) plans. These rules are covered in Pub. 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations.

We welcome your comments about this publication and your suggestions for future editions.

You can send us comments through IRS.gov/FormComments . Or you can write to the Internal Revenue Service, Tax Forms and Publications, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each comment received, we do appreciate your feedback and will consider your comments and suggestions as we revise our tax forms, instructions, and publications. Don’t send tax questions, tax returns, or payments to the above address.

If you have a tax question not answered by this publication or the How To Get Tax Help section at the end of this publication, go to the IRS Interactive Tax Assistant page at IRS.gov/Help/ITA where you can find topics by using the search feature or viewing the categories listed.

Go to IRS.gov/Forms to download current and prior-year forms, instructions, and publications.

Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order prior-year forms and instructions. The IRS will process your order for forms and publications as soon as possible. Don’t resubmit requests you’ve already sent us. You can get forms and publications faster online.

If you have a tax question not answered by this publication, check IRS.gov and How To Get Tax Help at the end of this publication.

1. Definitions You Need To Know

Certain terms used in this publication are defined below. The same term used in another publication may have a slightly different meaning.

Annual additions are the total of all your contributions in a year, employee contributions (not including rollovers), and forfeitures allocated to a participant's account.

Annual benefits are the benefits to be paid yearly in the form of a straight life annuity (with no extra benefits) under a plan to which employees don't contribute and under which no rollover contributions are made.

A business is an activity in which a profit motive is present and economic activity is involved. Service as a newspaper carrier under age 18 or as a public official isn’t a business.

A common-law employee is any individual who, under common law, would have the status of an employee. A leased employee can also be a common-law employee.

A common-law employee is a person who performs services for an employer who has the right to control and direct the results of the work and the way in which it is done. For example, the employer:

Provides the employee's tools, materials, and workplace; and

Can fire the employee.

Common-law employees aren't self-employed and can't set up retirement plans for income from their work, even if that income is self-employment income for social security tax purposes. For example, common-law employees who are ministers, members of religious orders, full-time insurance salespeople, and U.S. citizens employed in the United States by foreign governments can't set up retirement plans for their earnings from those employments, even though their earnings are treated as self-employment income.

However, an individual may be a common-law employee and a self-employed person as well. For example, an attorney can be a corporate common-law employee during regular working hours and also practice law in the evening as a self-employed person. In another example, a minister employed by a congregation for a salary is a common-law employee even though the salary is treated as self-employment income for social security tax purposes. However, fees reported on Schedule C (Form 1040), Profit or Loss From Business, for performing marriages, baptisms, and other personal services are self-employment earnings for qualified plan purposes.

Compensation for plan allocations is the pay a participant received from you for personal services for a year. You can generally define compensation as including all the following payments.

Wages and salaries.

Fees for professional services.

Other amounts received (cash or noncash) for personal services actually rendered by an employee, including, but not limited to, the following items.

Commissions and tips.

Fringe benefits.

For a self-employed individual, compensation means the earned income, discussed later, of that individual.

Compensation generally includes amounts deferred at the employee's election in the following employee benefit plans.

Section 401(k) plans.

Section 403(b) plans.

SIMPLE IRA plans.

Section 457 deferred compensation plans.

Section 125 cafeteria plans.

However, an employer can choose to exclude elective deferrals under the above plans from the definition of compensation. The limit on elective deferrals is discussed in chapter 2 under Salary Reduction Simplified Employee Pension (SARSEP) and in chapter 4.

In figuring the compensation of a participant, you can treat any of the following amounts as the employee's compensation.

The employee's wages as defined for income tax withholding purposes.

The employee's wages you report in box 1 of Form W-2, Wage and Tax Statement.

The employee's social security wages (including elective deferrals).

Compensation generally can't include either of the following items.

Nontaxable reimbursements or other expense allowances.

Deferred compensation (other than elective deferrals).

A special definition of compensation applies for SIMPLE plans. See chapter 3 .

A contribution is an amount you pay into a plan for all those participating in the plan, including self-employed individuals. Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant.

A deduction is the plan contribution you can subtract from gross income on your federal income tax return. Limits apply to the amount deductible.

Earned income is net earnings from self-employment, discussed later, from a business in which your services materially helped to produce the income.

You can also have earned income from property your personal efforts helped create, such as royalties from your books or inventions. Earned income includes net earnings from selling or otherwise disposing of the property, but it doesn't include capital gains. It includes income from licensing the use of property other than goodwill.

Earned income includes amounts received for services by self-employed members of recognized religious sects opposed to social security benefits who are exempt from self-employment tax.

If you have more than one business, but only one has a retirement plan, only the earned income from that business is considered for that plan.

An elective deferral is the contribution made by employees to a qualified retirement plan.

Non-owner employees: The employee salary reduction/elective deferral contributions must be elected/made by the end of the tax year and deposited into the employee’s plan account within 7 business days (safe harbor) and no later than 15 days.

Owner/employees: The employee deferrals must be elected by the end of the tax year and can then be made by the tax return filing deadline, including extensions.

An employer is generally any person for whom an individual performs or did perform any service, of whatever nature, as an employee. A sole proprietor is treated as its own employer for retirement plan purposes. However, a partner isn't an employer for retirement plan purposes. Instead, the partnership is treated as the employer of each partner.

A highly compensated employee is an individual who:

Owned more than 5% of the interest in your business at any time during the year or the preceding year, regardless of how much compensation that person earned or received; or

For the preceding year, received compensation from you of more than $135,000 (if the preceding year is 2022 and increased to $150,000 for 2023), more than $155,000 (if the preceding year is 2024), and, if you so choose, was in the top 20% of employees when ranked by compensation.

A leased employee who isn't your common-law employee must generally be treated as your employee for retirement plan purposes if they do all the following.

Provides services to you under an agreement between you and a leasing organization.

Has performed services for you (or for you and related persons) substantially full time for at least 1 year.

Performs services under your primary direction or control.

A leased employee isn't treated as your employee if all the following conditions are met.

Leased employees aren't more than 20% of your non-highly compensated workforce.

The employee is covered under the leasing organization's qualified pension plan.

The leasing organization's plan is a money purchase pension plan that has all the following provisions.

Immediate participation. (This requirement doesn't apply to any individual whose compensation from the leasing organization in each plan year during the 4-year period ending with the plan year is less than $1,000.)

Full and immediate vesting.

A nonintegrated employer contribution rate of at least 10% of compensation for each participant.

For SEP and qualified plans, net earnings from self-employment are your gross income from your trade or business (provided your personal services are a material income-producing factor) minus allowable business deductions. Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deduction allowed for the deductible part of your self-employment tax.

Net earnings from self-employment don’t include items excluded from gross income (or their related deductions) other than foreign earned income and foreign housing cost amounts.

For the deduction limits, earned income is net earnings for personal services actually rendered to the business. You take into account the income tax deduction for the deductible part of self-employment tax and the deduction for contributions to the plan made on your behalf when figuring net earnings.

Net earnings include a partner's distributive share of partnership income or loss (other than separately stated items, such as capital gains and losses). They don’t include income passed through to shareholders of S corporations. Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership. Distributions of other income or loss to limited partners aren't net earnings from self-employment.

For SIMPLE plans, net earnings from self-employment are the amount on line 4 ofSchedule SE (Form 1040), Self-Employment Tax, before subtracting any contributions made to the SIMPLE plan for yourself.

A qualified plan is a retirement plan that offers a tax-favored way to save for retirement. You can deduct contributions made to the plan for your employees. Earnings on these contributions are generally tax free until distributed at retirement. Profit-sharing, money purchase, and defined benefit plans are qualified plans. A 401(k) plan is also a qualified plan.

A participant is an eligible employee who is covered by your retirement plan. See the discussions, later, of the different types of plans for the definition of an employee eligible to participate in each type of plan.

A partner is an individual who shares ownership of an unincorporated trade or business with one or more persons. For retirement plans, a partner is treated as an employee of the partnership.

An individual in business for himself or herself, and whose business isn't incorporated, is self-employed. Sole proprietors and partners are self-employed. Self-employment can include part-time work.

Not everyone who has net earnings from self-employment for social security tax purposes is self-employed for qualified plan purposes. See Common-law employee and Net earnings from self-employment , earlier.

In addition, certain fishermen may be considered self-employed for setting up a qualified plan. See Pub. 595, Capital Construction Fund for Commercial Fishermen, for the special rules used to determine whether fishermen are self-employed.

A sole proprietor is an individual who owns an unincorporated business alone, including a single-member limited liability company that is treated as a disregarded entity for tax purposes. For retirement plans, a sole proprietor is treated as both an employer and an employee.

2. Simplified Employee Pensions (SEPs)

Setting up a sep.

How much can I contribute

Deducting contributions

Salary reduction simplified employee pensions (SARSEPs)

Distributions (withdrawals)

Additional taxes

Reporting and disclosure requirements

Useful Items

Publications

590-A Contributions to Individual Retirement Arrangements (IRAs)

590-B Distributions from Individual Retirement Arrangements (IRAs)

3998 Choosing a Retirement Solution for Your Small Business

4285 SEP Checklist

4286 SARSEP Checklist

4333 SEP Retirement Plans for Small Businesses

4336 SARSEP for Small Businesses

4407 SARSEP—Key Issues and Assistance

Forms (and Instructions)

W-2 Wage and Tax Statement

1040 U.S. Individual Income Tax Return

1040-SR U.S. Tax Return for Seniors

5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement

5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement

8880 Credit for Qualified Retirement Savings Contributions

8881 Credit for Small Employer Pension Plan Startup Costs

A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan.

Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained.

SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but doesn't need to be set up for excludable employees (defined later).

An eligible employee is an individual who meets all the following requirements.

Has reached age 21.

Has worked for you in at least 3 of the last 5 years.

Has received at least $750 in compensation from you in 2023. The amount remains the same for 2023.

The following employees can be excluded from coverage under a SEP.

Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.

Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you. For more information about nonresident aliens, see Pub. 519, U.S. Tax Guide for Aliens.

There are three basic steps in setting up a SEP.

You must execute a formal written agreement to provide benefits to all eligible employees.

You must give each eligible employee certain information about the SEP.

A SEP-IRA must be set up by or for each eligible employee.

You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. However, see When not to use Form 5305-SEP , later.

If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Keep the original form. Don't file it with the IRS. Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. See the Form 5305-SEP instructions for details. If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP.

You can't use Form 5305-SEP if any of the following apply.

You currently maintain any other qualified retirement plan other than another SEP.

You have any eligible employees for whom IRAs haven’t been set up.

You use the services of leased employees, who aren't your common-law employees (as described in chapter 1).

You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP.

An affiliated service group described in section 414(m).

A controlled group of corporations described in section 414(b).

Trades or businesses under common control described in section 414(c).

You don't pay the cost of the SEP contributions.

You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. An IRS model SEP isn't considered adopted until you give each employee this information.

A SEP-IRA must be set up by or for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. You send SEP contributions to the financial institution where the SEP-IRA is maintained.

You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year.

How Much Can I Contribute?

The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. If you are self-employed, you can contribute to your own SEP-IRA. Contributions must be in the form of money (cash, check, or money order). You can't contribute property. However, participants may be able to transfer or roll over certain property from one retirement plan to another. See Pubs. 590-A and 590-B for more information about rollovers.

You don't have to make contributions every year. But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made.

Contributions are deductible within limits, as discussed later, and generally aren't taxable to the plan participants.

A SEP-IRA can't be a Roth IRA. Employer contributions to a SEP-IRA won’t affect the amount an individual can contribute to a Roth or traditional IRA.

Unlike regular contributions to a traditional IRA before 2020, contributions under a SEP can be made to participants over age 70½. If you are self-employed, you can also make contributions under the SEP for yourself even if you are over age 70½. Participants age 72 or over (if age 70½ was reached after December 31, 2019) must take RMDs.

Individuals who reach age 72 after December 31, 2022, may delay receiving their RMDs until April 1 of the year following the year in which they reach age 73.

To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year.

Contribution Limits

Contributions you make for 2023 to a common-law employee's SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $66,000. Compensation generally doesn't include your contributions to the SEP. The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants.

Your employee has earned $21,000 for 2023. The maximum contribution you can make to your employee’s SEP-IRA is $5,250 (25% (0.25) x $21,000).

The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. However, special rules apply when figuring your maximum deductible contribution. See Deduction Limit for Self-Employed Individuals , later.

You can't consider the part of an employee's compensation over $330,000 when figuring your contribution limit for that employee. However, $66,000 is the maximum contribution for an eligible employee. These limits increase to $345,000 and $69,000, respectively, in 2024.

Your employee has earned $260,000 for 2023. Because of the maximum contribution limit for 2023, you can only contribute $66,000 to your employee’s SEP-IRA.

If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $66,000 or 100% of the participant's compensation. When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain.

Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2023 that exceed the lesser of the following amounts.

25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment).

Don't include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later).

Deducting Contributions

Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA.

The most you can deduct for your contributions to your or your employee's SEP-IRA is the lesser of the following amounts.

Your contributions (including any excess contributions carryover).

25% of the compensation (limited to $330,000 per participant) paid to the participants during 2023, from the business that has the plan, not to exceed $66,000 per participant.

If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions.

The deduction for the deductible part of your self-employment tax.

The deduction for contributions to your own SEP-IRA.

The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Then, figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5.

Carryover of Excess SEP Contributions

If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit.

If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4.

When you can deduct contributions made for a year depends on the tax year for which the SEP is maintained.

If the SEP is maintained on a calendar-year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends.

If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year.

You are a fiscal-year taxpayer whose tax year ends June 30. You maintain a SEP on a calendar-year basis. You deduct SEP contributions made for calendar year 2023 on your tax return for your tax year ending June 30, 2024.

Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U.S. Return of Partnership Income; and corporations deduct them on Form 1120, U.S. Corporation Income Tax Return, or Form 1120-S, U.S. Income Tax Return for an S Corporation.

Sole proprietors and partners deduct contributions for themselves on line 15 of Schedule 1 (Form 1040). (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., you receive from the partnership.)

Salary Reduction Simplified Employee Pensions (SARSEPs)

A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. (See the Caution next.) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. This contribution is called an elective deferral because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them.

A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met.

At least 50% of your employees eligible to participate choose to make elective deferrals.

You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year.

The elective deferrals of your highly compensated employees meet the SARSEP average deferral percentage (ADP) test.

Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) can't be more than 125% of the ADP of all non-highly compensated employees eligible to participate. A highly compensated employee is defined in chapter 1.

The deferral percentage for an employee for a year is figured as follows.

For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. See Compensation in chapter 1. Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they aren't included in the income of your employees for income tax purposes.

If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1.

Compensation doesn't include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts.

You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP.

Limit on Elective Deferrals

The most a participant can choose to defer for calendar year 2023 is the lesser of the following amounts.

25% of the participant's compensation (limited to $330,000 of the participant's compensation).

The $22,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following.

Cash or deferred arrangement (section 401(k) plan).

Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan).

SIMPLE IRA plan.

In 2024, the $330,000 limit increases to $345,000, and the $22,500 limit increases to $23,000.

A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit is $7,500 for 2023 and 2024. Elective deferrals aren't treated as catch-up contributions for 2023 until they exceed the elective deferral limit (the lesser of 25% of compensation, or $22,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). However, the catch-up contribution a participant can make for a year can't exceed the lesser of the following amounts.

The excess of the participant's compensation over the elective deferrals that aren't catch-up contributions.

Catch-up contributions aren't subject to the elective deferral limit (the lesser of 25% of compensation, or $22,500 in 2023 and $23,000 in 2024).

If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA can't exceed the lesser of 25% of the employee's compensation, or $66,000 for 2023 ($69,000 for 2024). The same rule applies to contributions you make to your own SEP-IRA. See Contribution Limits , earlier.

For figuring the 25% limit on elective deferrals, compensation doesn't include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans.

Tax Treatment of Deferrals

Elective deferrals that aren't more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) taxes.

For 2023, excess deferrals are the elective deferrals for the year that are more than the $22,500 limit discussed earlier. For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $30,000. The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4.

Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. If you don't notify them within this time period, you must pay a 10% tax on the excess. For an explanation of the notification requirements, see Revenue Procedure 91-44, 1991-2 C.B. 733. If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form.

Don’t include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. You must also include them in box 12. Check the “Retirement plan” checkbox in box 13. For more information, see the Form W-2 instructions.

As an employer, you can't prohibit distributions from a SEP-IRA. Also, you can't make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts.

Distributions are subject to IRA rules. Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 72 (if age 70½ was reached after December 31, 2019). For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Pubs. 590-A and 590-B.

Additional Taxes

The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions.

Making excess contributions.

Making early withdrawals.

Not making required withdrawals.

For information about these taxes, see Pubs. 590-A and 590-B. Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next.

If an employee improperly uses their SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. In that case, the SEP-IRA will no longer qualify as an IRA. For a list of prohibited transactions, see Prohibited Transactions in chapter 4.

If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Also, the employee may have to pay the additional tax for making early withdrawals.

If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. See Setting Up a SEP , earlier. Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. You must also give them notice of any excess contributions. For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary SARSEP).

Even if you didn't use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP.

3. SIMPLE Plans

SIMPLE IRA plans

SIMPLE 401(k) plans

4284 SIMPLE IRA Plan Checklist

4334 SIMPLE IRA Plans for Small Businesses

5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—Not for Use With a Designated Financial Institution

5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution

8881 Credit for Small Employer Pension Plan Startup Costs and Auto Enrollment

A SIMPLE plan is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. In addition, you will contribute matching or nonelective contributions.

SIMPLE plans can only be maintained on a calendar-year basis.

A SIMPLE plan can be set up in either of the following ways.

Using SIMPLE IRAs (SIMPLE IRA plan).

As part of a 401(k) plan (SIMPLE 401(k) plan).

SIMPLE IRA Plan

A SIMPLE IRA plan is a retirement plan that uses a SIMPLE IRA for each eligible employee. Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan , later.

Who Can Set up a SIMPLE IRA Plan?

You can set up a SIMPLE IRA plan if you meet both the following requirements.

You meet the employee limit.

You don't maintain another qualified plan unless the other plan is for collective bargaining employees.

You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1).

Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan.

If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it for the 2 calendar years immediately following the calendar year for which you last met it.

A different rule applies if you don't meet the 100-employee limit because of an acquisition, disposition, or similar transaction. Under this rule, the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following conditions are satisfied.

Coverage under the plan hasn’t significantly changed during the grace period.

The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer.

The SIMPLE IRA plan must generally be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year the SIMPLE IRA plan becomes effective.

If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees.

Who Can Participate in a SIMPLE IRA Plan?

Any employee who received at least $5,000 in compensation during any 2 years preceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate. The term “employee” includes a self-employed individual who received earned income.

You can use less restrictive eligibility requirements (but not more restrictive ones) by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both. For example, you can allow participation for employees who received at least $3,000 in compensation during any preceding calendar year. However, you can't impose any other conditions for participating in a SIMPLE IRA plan.

The following employees don't need to be covered under a SIMPLE IRA plan.

Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you.

Nonresident alien employees who have received no U.S. source wages, salaries, or other personal services compensation from you.

Compensation for employees is the total wages, tips, and other compensation from the employer subject to federal income tax withholding and the amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. Compensation also includes the employee's salary reduction contributions made under this plan and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the employer on Form W-2. If you are self-employed, compensation is your net earnings from self-employment (line 4 of Schedule SE (Form 1040) before subtracting any contributions made to the SIMPLE IRA plan for yourself.

How To Set up a SIMPLE IRA Plan

You can use Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. Each form is a model SIMPLE plan document. Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the contributions.

Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving their SIMPLE IRA plan contributions. Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution.

The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. Keep the original form. Don’t file it with the IRS.

If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can use the form to satisfy other requirements, including the following.

Meeting employer notification requirements for the SIMPLE IRA plan. Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee.

Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees.

You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you didn't previously maintain a SIMPLE IRA plan. This requirement doesn't apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. A SIMPLE IRA plan can't have an effective date that is before the date you actually adopt the plan.

SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. A SIMPLE IRA must be set up for each eligible employee. Forms 5305-S, SIMPLE Individual Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account, are model trust and custodial account documents the participant and the trustee (or custodian) can use for this purpose.

A SIMPLE IRA can't be a Roth IRA. Contributions to a SIMPLE IRA won't affect the amount an individual can contribute to a Roth or traditional IRA.

A SIMPLE IRA must be set up for an employee before the first date by which a contribution is required to be deposited into the employee's IRA. See Time limits for contributing funds , later, under Contribution Limits .

Notification Requirement

If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period.

The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan.

Your decision to make either matching contributions or nonelective contributions (discussed later).

A summary description provided by the financial institution.

Written notice that their balance can be transferred without cost or penalty if they use a designated financial institution.

The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). However, the dates of this period are modified if you set up a SIMPLE IRA plan mid-year (for example, on July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan.

A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. For example, a SIMPLE IRA plan can provide a 90-day election period instead of the 60-day period. Similarly, in addition to the 60-day period, a SIMPLE IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year.

Contributions are made up of salary reduction contributions and employer contributions. You, as the employer, must make either matching contributions or nonelective contributions, defined later. No other contributions can be made to the SIMPLE IRA plan. These contributions, which you can deduct, must be made timely. See Time limits for contributing funds , later.

The amount the employee chooses to have you contribute to a SIMPLE IRA on their behalf can't be more than $15,500 for 2023 and increases to $16,000 for 2024. These contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar amount. You can't place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $15,500 limit for 2023 ($16,000 for 2024).

If you or an employee participates in any other qualified plan during the year and you or your employee has salary reduction contributions (elective deferrals) under those plans, the salary reduction contributions under a SIMPLE IRA plan also count toward the overall annual limit ($22,500 for 2023; $23,000 for 2024) on exclusion of salary reduction contributions and other elective deferrals.

A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit for SIMPLE IRA plans is $3,500 for 2023 and 2024. Salary reduction contributions aren't treated as catch-up contributions until they exceed $15,500 for 2023 ($16,000 for 2024). However, the catch-up contribution a participant can make for a year can't exceed the lesser of the following amounts.

The excess of the participant's compensation over the salary reduction contributions that aren't catch-up contributions.

You are generally required to match each employee's salary reduction contribution(s) on a dollar-for-dollar basis up to 3% of the employee's compensation, where only employees who have elected to make contributions will receive an employer matching contribution. This requirement doesn't apply if you make nonelective contributions, as discussed later.

In 2023, your employee earned $25,000 and chose to defer 5% of their salary. The net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make 3% matching contributions. The total contribution made for the employee is $2,000, figured as follows.

The total contribution you make for yourself is $5,200, figured as follows.

If you choose a matching contribution less than 3%, the percentage must be at least 1%. You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. You can't choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective.

Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 (or some lower amount you select) of compensation from you for the year. If you make this choice, you must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. Only $330,000 of the employee's compensation can be taken into account to figure the contribution limit in 2023 ($345,000 in 2024).

If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year.

In 2023, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. You make a 2% nonelective contribution. Both of you are under age 50. The total contribution you make for Jane is $4,320, figured as follows.

The total contribution you make for yourself is $6,000, figured as follows.

Using the same facts as in Example 1 above, the maximum contribution you make for Jane or for yourself if you each earned $75,000 is $14,000, figured as follows.

You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would have otherwise have been payable to the employee in cash. You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year. Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions.

You can deduct SIMPLE IRA contributions in the tax year within which the calendar year for which contributions were made ends. You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year.

The due date for making contributions for 2023 for most plans is Monday, April 15, 2024.

Your tax year is the fiscal year ending June 30. Contributions under a SIMPLE IRA plan for calendar year 2023 (including contributions made by the due date for the return for the tax year that ends on June 30, 2024) are deductible in the tax year ending June 30, 2024.

You are a sole proprietor whose tax year is the calendar year. Contributions under a SIMPLE IRA plan for calendar year 2023 (including contributions made by the due date for the return for the 2023 tax year) are deductible in the 2023 tax year.

Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), partnerships deduct them on Form 1065, and corporations deduct them on Form 1120 or 1120-S.

Sole proprietors and partners deduct contributions for themselves on line 15 of Schedule 1 (Form 1040). (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you receive from the partnership.)

Tax Treatment of Contributions

You can deduct your contributions and your employees can exclude these contributions from their gross income. SIMPLE IRA plan contributions aren't subject to federal income tax withholding. However, salary reduction contributions are subject to social security, Medicare, and FUTA taxes. Matching and nonelective contributions aren't subject to these taxes.

Don’t include SIMPLE IRA plan contributions in the “Wages, tips, other compensation” box of Form W-2. You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. You must also include them in box 12. Check the “Retirement plan” checkbox in box 13. For more information, see the Form W-2 instructions.

Distributions from a SIMPLE IRA are subject to IRA rules and are generally includible in income for the year received. Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan.

Generally, you or your employee must begin to receive distributions from a SIMPLE IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 72 (if age 70½ was reached after December 31, 2019).

Early withdrawals are generally subject to a 10% additional tax. However, the additional tax is increased to 25% if funds are withdrawn within 2 years of beginning participation.

See Pubs. 590-A and 590-B for information about IRA rules, including those on the tax treatment of distributions, rollovers, required distributions, and income tax withholding.

If you need help to set up or maintain a SIMPLE IRA plan, go to the IRS website and search SIMPLE IRA Plan .

SIMPLE 401(k) Plan

You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit, as discussed earlier under SIMPLE IRA Plan. A SIMPLE 401(k) plan is a qualified retirement plan and must generally satisfy the rules discussed under Qualification Rules in chapter 4, including the required distribution rules. However, a SIMPLE 401(k) plan isn't subject to the nondiscrimination and top-heavy rules discussed in chapter 4 if the plan meets the conditions listed below.

Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $15,500 for 2023 ($16,000 for 2024). If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $3,500 for 2023 and 2024. See Catch-up contributions , earlier, under Contribution Limits.

You must make either:

Matching contributions up to 3% of compensation for the year, or

Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year.

No other contributions can be made to the trust.

No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan sponsored by you on behalf of any employee eligible to participate in the SIMPLE 401(k) plan.

The employee's rights to any contributions are nonforfeitable.

No more than $330,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2023 ($345,000 in 2024). Compensation is defined earlier in this chapter.

The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. See Notification Requirement , earlier in this chapter.

Please note that Forms 5304-SIMPLE and 5305-SIMPLE can’t be used to establish a SIMPLE 401(k) plan. To set up a SIMPLE 401(k) plan, see Adopting a Written Plan in chapter 4.

4. Qualified Plans

Kinds of plans

Qualification rules

Setting up a qualified plan

Minimum funding requirement

Contributions

Employer deduction

Elective deferrals (401(k) plans)

Qualified Roth contribution program

Distributions

Prohibited transactions

Reporting requirements

575 Pension and Annuity Income

3066 Have you had your check-up this year? for Retirement Plans

4222 401(k) Plans for Small Businesses

4530 Designated Roth Accounts under a 401(k), 403(b) or governmental 457(b) plan

4531 401(k) Plan Checklist

4674 Automatic Enrollment 401(k) Plans for Small Businesses

4806 Profit Sharing Plans for Small Businesses

Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc.

1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Schedule C (Form 1040) Profit or Loss From Business

Schedule F (Form 1040) Profit or Loss From Farming

5300 Application for Determination for Employee Benefit Plan

5310 Application for Determination for Terminating Plan

5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

5330 Return of Excise Taxes Related to Employee Benefit Plans

5500 Annual Return/Report of Employee Benefit Plan

5500-EZ Annual Return of A One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan

5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan

8717 User Fee for Employee Plan Determination Letter Request

8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits

These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H.R. 10 plans. A sole proprietor or a partnership can set up one of these plans. A common-law employee or a partner can't set up one of these plans. The plans described here can also be set up and maintained by employers that are corporations. All of the rules discussed here apply to corporations except where specifically limited to the self-employed.

The plan must be for the exclusive benefit of employees or their beneficiaries. These qualified plans can include coverage for a self-employed individual.

As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax free until distributed by the plan.

Kinds of Plans

There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. You can have more than one qualified plan, but your contributions to all the plans must not total more than the overall limits discussed under Contributions and Employer Deduction , later.

Defined Contribution Plan

A defined contribution plan provides an individual account for each participant in the plan. It provides benefits to a participant largely based on the amount contributed to that participant's account. Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan.

Although it is called a profit-sharing plan, you don’t actually have to make a business profit for the year in order to make a contribution (except for yourself if you are self-employed, as discussed under Self-employed individual , later). A profit-sharing plan can be set up to allow for discretionary employer contributions, meaning the amount contributed each year to the plan isn't fixed. An employer may even make no contribution to the plan for a given year.

The plan must provide a definite formula for allocating the contribution among the participants and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences.

In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase pension plan (discussed next) or a defined benefit plan (discussed later).

Contributions to a money purchase pension plan are fixed and aren't based on your business profits. For example, a money purchase pension plan may require that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income).

A defined benefit plan is any plan that isn't a defined contribution plan. Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Actuarial assumptions and computations are required to figure these contributions. Generally, you will need continuing professional help to have a defined benefit plan.

Qualification Rules

To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed. The following is a brief overview of important qualification rules that generally haven't yet been discussed. It isn't intended to be all-inclusive. See Setting Up a Qualified Plan , later.

Your plan must make it impossible for its assets to be used for, or diverted to, purposes other than the exclusive benefit of employees and their beneficiaries. As a general rule, the assets can't be diverted to the employer.

To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following.

50 employees.

The greater of:

40% of all employees, or

Two employees.

Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees.

Your plan must not provide for contributions or benefits that are more than certain limits. The limits apply to the annual contributions and other additions to the account of a participant in a defined contribution plan and to the annual benefit payable to a participant in a defined benefit plan. These limits are discussed later in this chapter under Contributions.

Your plan must satisfy certain requirements regarding when benefits vest. A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. A benefit is nonforfeitable if it can't be lost upon the happening, or failure to happen, of any event. Special rules apply to forfeited benefit amounts. In defined contribution plans, forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions.

Forfeitures under a defined benefit plan can't be used to increase the benefits any employee would otherwise receive under the plan. Forfeitures must be used instead to reduce employer contributions.

In general, an employee must be allowed to participate in your plan if they meet both the following requirements.

Has at least 1 year of service (2 years if the plan isn't a 401(k) plan and provides that after not more than 2 years of service the employee has a nonforfeitable right to all their accrued benefit).

See Elective Deferrals )401(k) Plans , later, for additional information regarding conditions of participation in a 401(k) plan.

A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules. These rules include those in all the following areas.

Nondiscrimination in coverage, contributions, and benefits.

Minimum age and service requirements.

Limits on contributions and benefits.

Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods.

The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan.

The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs.

The plan year in which the participant separates from service.

Your plan can provide for payment of retirement benefits before the normal retirement age. If your plan offers an early retirement benefit, a participant who separates from service before satisfying the early retirement age requirement is entitled to that benefit if the participant meets both the following requirements.

Satisfies the service requirement for the early retirement benefit.

Separates from service with a nonforfeitable right to an accrued benefit. The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met.

Special rules require minimum annual distributions from qualified plans, generally beginning after age 72 (if age 70½ was reached after December 31, 2019). See Required Distributions under Distributions , later.

Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms.

A qualified joint and survivor annuity for a vested participant who doesn't die before the annuity starting date.

A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse.

The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met.

The participant doesn't choose benefits in the form of a life annuity.

The plan pays the full vested account balance to the participant's surviving spouse (or other beneficiary if the surviving spouse consents or if there is no surviving spouse) if the participant dies.

The plan isn't a direct or indirect transferee of a plan that must provide automatic survivor benefits.

If automatic survivor benefits are required for a spouse under a plan, they must consent to a loan that uses as security the accrued benefits in the plan.

Each plan participant may be permitted to waive the joint and survivor annuity or the pre-retirement survivor annuity (or both), but only if the participant has the written consent of the spouse. The plan must also allow the participant to withdraw the waiver. The spouse's consent must be witnessed by a plan representative or notary public.

A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit isn't greater than $5,000 ($7,000 in 2024).

However, the distribution can't be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consents in writing to the distribution. If the present value is greater than $5,000 ($7,000 in 2024), the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit.

Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits.

A plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account or annuity, unless the participant chooses otherwise. A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. See Section 402(f) notice under Distributions , later, for more details.

Your plan must provide that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan then terminated) receive a benefit equal to or more than the benefit they would have been entitled to just before the merger, etc. (if the plan had then terminated).

Your plan must provide that a participant's or beneficiary's benefits under the plan can't be taken away by any legal or equitable proceeding except as provided below or pursuant to certain judgments or settlements against the participant for violations of plan rules.

A loan from the plan (not from a third party) to a participant or beneficiary isn't treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. A disqualified person is defined later in this chapter under Prohibited Transactions.

Compliance with a QDRO doesn't result in a prohibited assignment or alienation of benefits.

Payments to an alternate payee under a QDRO before the participant reaches age 59½ aren't subject to the 10% additional tax that would otherwise apply under certain circumstances. Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity.

Your plan must not permit a benefit reduction for a post-separation increase in the social security benefit level or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from service and has nonforfeitable rights to benefits. This rule also applies to plans supplementing the benefits provided by other federal or state laws.

If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. See Limit on Elective Deferrals , later in this chapter.

A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees.

A plan is top-heavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees. Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan.

Most qualified plans, whether or not top-heavy, must contain provisions that meet the top-heavy requirements and will take effect in plan years in which the plans are top-heavy. These qualification requirements for top-heavy plans are explained in section 416 and its regulations.

The top-heavy plan requirements don't apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. QACAs (discussed later) also aren't subject to top-heavy requirements.

Setting up a Qualified Plan

There are two basic steps in setting up a qualified plan. First, you adopt a written plan. Then, you invest the plan assets.

You, the employer, are responsible for setting up and maintaining the plan.

To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year. If you are a sole proprietor with a new section 401(k) plan that you adopted after the end of the taxable year that ends after or with the first plan year, and you are the only participant, your elective deferrals must be paid to the plan before the time for filing your return for that taxable year (determined without regard to any extensions) in order for the elective deferrals to be treated as having been made by the end of the first plan year.

Adopting a Written Plan

You must adopt a written plan. The plan can be an IRS pre-approved plan offered by a sponsoring organization. Or it can be an individually designed plan.

To qualify, the plan you set up must be in writing and must be communicated to your employees. The plan's provisions must be stated in the plan. It isn't sufficient for the plan to merely refer to a requirement of the Internal Revenue Code.

Most qualified plans follow a standard form of plan approved by the IRS. An IRS pre-approved plan is a plan, including a plan covering self-employed individuals, that is made available by a provider for adoption by employers. Under the prior IRS pre-approved plan program, a plan could be a master plan, a prototype plan, or a volume submitter plan. Under the restructured program, the three plan types were combined into one type called a pre-approved plan. IRS pre-approved plans include both standardized plans and nonstandardized plans. An IRS pre-approved plan may use a single funding medium, for example, a trust or custodial account document, for the joint use of all adopting employers or separate funding mediums established for each adopting employer. An IRS pre-approved plan may consist of an adoption agreement plan or a single document plan. For more information about IRS pre-approved plans, see Revenue Procedure 2017-41, 2017-29 I.R.B. 92, available at IRS.gov/irb/2017-29_IRB#RP-2017-41 .

The following organizations can generally provide IRS pre-approved plans.

Banks (including some savings and loan associations and federally insured credit unions).

Trade or professional organizations.

Insurance companies.

Mutual funds.

Third-party administrators.

If you prefer, you can set up an individually designed plan to meet specific needs. Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. You may need professional help for this. See Revenue Procedure 2024-4, 2024-1 I.R.B. 160, available at IRS.gov/irb/2024-4_IRB , as annually updated, that may help you decide whether to apply for approval.

The fee mentioned earlier for requesting a determination letter doesn't apply to employers who have 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year. At least one of them must be a non-highly compensated employee participating in the plan. The fee doesn't apply to requests made by the later of the following dates.

The end of the fifth plan year the plan is in effect.

The end of any remedial amendment period for the plan that begins within the first 5 plan years.

For more information about whether the user fee applies, see Revenue Procedure 2020-4, 2020-1 I.R.B. 148, available at IRS.gov/irb/2020-01_IRB , as may be annually updated; Notice 2017-1, 2017-2 I.R.B. 367, available at IRS.gov/irb/2017-02_IRB ; and Form 8717.

Investing Plan Assets

In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets.

You can establish a trust or custodial account to invest the funds.

You, the trust, or the custodial account can buy an annuity contract from an insurance company. Life insurance can be included only if it is incidental to the retirement benefits.

You set up a trust by a legal instrument (written document). You may need professional help to do this.

You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee.

You don't need a trust or custodial account, although you can have one, to invest the plan's funds in annuity contracts or face-amount certificates. If anyone other than a trustee holds them, however, the contracts or certificates must state they aren't transferable.

For information on other important plan requirements, see Qualification Rules , earlier in this chapter.

Minimum Funding Requirement

In general, if your plan is a money purchase pension plan or a defined benefit plan, you must actually pay enough into the plan to satisfy the minimum funding standard for each year. Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated, and you should seek professional help in order to meet these contribution requirements. For information on this funding requirement, see section 430 and its regulations.

If your plan is a defined benefit plan subject to the minimum funding requirements, you must generally make quarterly installment payments of the required contributions. If you don't pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment.

The due dates for the installments are 15 days after the end of each quarter. For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year).

Each quarterly installment must be 25% of the required annual payment.

Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if made by 8½ months after the end of that year.

A qualified plan is generally funded by your contributions. However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. See Employee Contributions and Elective Deferrals , later.

You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year.

You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. Your net earnings must be from your personal services, not from your investments. If you have a net loss from self-employment, you can't make contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation.

Employer Contributions

There are certain limits on the contributions and other annual additions you can make each year for plan participants. There are also limits on the amount you can deduct. See Deduction Limits , later.

Limits on Contributions and Benefits

Your plan must provide that contributions or benefits can't exceed certain limits. The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan.

For 2023, the annual benefit for a participant under a defined benefit plan can't exceed the lesser of the following amounts.

100% of the participant's average compensation for their highest 3 consecutive calendar years.

$265,000 for 2023 ($275,000 for 2024).

For 2023, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant can't exceed the lesser of the following amounts.

100% of the participant's compensation.

$66,000 for 2023 ($69,000 for 2024).

Catch-up contributions (discussed later under Limit on Elective Deferrals ) aren't subject to the above limit.

Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. Even though these employee contributions aren't deductible, the earnings on them are tax free until distributed in later years. Also, these contributions must satisfy the actual contribution percentage (ACP) test of section 401(m)(2), a nondiscrimination test that applies to employee contributions and matching contributions. See Regulations sections 1.401(k)-2 and 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m).

When Contributions Are Considered Made

You generally apply your plan contributions to the year in which you make them. But you can apply them to the previous year if all the following requirements are met.

You make them by the due date of your tax return for the previous year (plus extensions).

The plan was established by the end of the previous year.

The plan treats the contributions as though it had received them on the last day of the previous year.

You do either of the following.

You specify in writing to the plan administrator or trustee that the contributions apply to the previous year.

You deduct the contributions on your tax return for the previous year. A partnership shows contributions for partners on Form 1065.

Your promissory note made out to the plan isn't a payment that qualifies for the deduction. Also, issuing this note is a prohibited transaction subject to tax. See Prohibited Transactions , later.

Employer Deduction

You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax free until distributed by the plan.

Deduction Limits

The deduction limit for your contributions to a qualified plan depends on the kind of plan you have.

The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) can't be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. See Deduction Limit for Self-Employed Individuals , later.

When figuring the deduction limit, the following rules apply.

Elective deferrals (discussed later) aren't subject to the limit.

Compensation includes elective deferrals.

The maximum compensation that can be taken into account for each employee in 2023 is $330,000 ($345,000 in 2024).

The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Consequently, an actuary must figure your deduction limit.

If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. Compensation is your net earnings from self-employment, defined in chapter 1. This definition takes into account both the following items.

The deduction for contributions on your behalf to the plan.

The deductions for your own contributions and your net earnings depend on each other. For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. Then, figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5.

Sole proprietors and partners deduct contributions for themselves on line 15 of Schedule 1 (Form 1040). (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership.)

If you contribute more to a plan than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. See Deduction Limit for Self-Employed Individuals , earlier. The amount you carry over and deduct may be subject to the excise tax discussed next.

Table 4-1. Carryover of Excess Contributions Illustrated Profit-Sharing Plan illustrates the carryover of excess contributions to a profit-sharing plan.

Excise Tax for Nondeductible (Excess) Contributions

If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions and you may be liable for an excise tax. In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs.

The 10% excise tax doesn't apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. Even if that contribution is more than your earned income from the trade or business for which the plan is set up, the difference isn't subject to this excise tax. See Minimum Funding Requirement , earlier.

You must report the tax on your nondeductible contributions on Form 5330. Form 5330 includes a computation of the tax. See the separate instructions for completing the form.

Elective Deferrals (401(k) Plans)

Your qualified plan can include a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. A plan with this type of arrangement is popularly known as a 401(k) plan. (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business.) This contribution is called an elective deferral because participants choose (elect) to defer receipt of the money.

In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans.

A profit-sharing plan.

A money purchase pension plan in existence on June 27, 1974, that included a salary reduction arrangement on that date.

A partnership can have a 401(k) plan.

Effective for plan years beginning after December 31, 2020, a 401(k) plan can’t require, as a condition of participation, that an employee complete a period of service that extends beyond the close of the earlier of (1) 1 year of service, or (2) the first period of 3 consecutive 12‑month periods (excluding 12-month periods beginning before January 1, 2021) during each of which the employee has completed at least 500 hours of service. Effective for plan years beginning after December 31, 2024, 3 consecutive 12-month periods are reduced to 2 consecutive 12‑month periods.

If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan. Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions .

You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. These are called nonelective contributions.

No more than $330,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2023. This limit is $345,000 for 2024.

If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. A SIMPLE 401(k) plan isn't subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3.

Certain rules apply to distributions from 401(k) plans. See Distributions From 401(k) Plans , later.

There is a limit on the amount an employee can defer each year under these plans. This limit applies without regard to community property laws. Your plan must provide that your employees can't defer more than the limit that applies for a particular year. The basic limit on elective deferrals is $22,500 for 2023 and increases to $23,000 for 2024. This limit applies to all salary reduction contributions and elective deferrals. If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income.

A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit is $7,500 for 2023 and 2024. Elective deferrals aren't treated as catch-up contributions for 2023 until they exceed the $22,500 limit ($23,000 limit for 2024), the ADP test limit of section 401(k)(3), or the plan limit (if any). However, the catch-up contributions a participant can make for a year can't exceed the lesser of the following amounts.

Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution.

Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. Elective deferrals are included in wages for social security, Medicare, and FUTA taxes.

Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals.

Don't include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. You must also include them in box 12. Check the “Retirement plan” checkbox in box 13. For more information, see the Form W-2 instructions.

Automatic Enrollment

Your 401(k) plan can have an automatic enrollment feature. Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on their behalf unless the employee affirmatively chooses not to have their pay reduced or chooses to have it reduced by a different percentage. These contributions are elective deferrals. An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). For more information, see Pub. 4674.

Under an EACA, a participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation. This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). There is no required deferral percentage.

Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met.

The participant must elect the withdrawal no later than 90 days after the date of the first elective contributions under the EACA.

The participant must withdraw the entire amount of EACA default contributions, including any earnings thereon.

If the plan allows withdrawals under the EACA, the amount of the withdrawal other than the amount of any designated Roth contributions must be included in the employee's gross income for the tax year in which the distribution is made. The additional 10% tax on early distributions won't apply to the distribution.

Under an EACA, employees must be given written notice of the terms of the EACA within a reasonable period of time before each plan year. The notice must be written in a manner calculated to be understood by the average employee and be sufficiently accurate and comprehensive in order to apprise the employee of their rights and obligations under the EACA. The notice must include an explanation of the employee's right to elect not to have elective contributions made on their behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is made. The notice must also explain how contributions will be invested in the absence of an investment election by the employee.

A QACA is a type of safe harbor plan. It contains an automatic enrollment feature, and mandatory employer contributions are required. If your plan includes a QACA, it won't be subject to the ADP test (discussed later) or the top-heavy requirements (discussed earlier). Additionally, your plan won't be subject to the ACP test if certain additional requirements are met. Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral contributions equal to a certain default percentage of compensation. In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). If an employee doesn't make an affirmative election, the default deferral percentage must meet the following conditions.

It must be applied uniformly.

It must not exceed 10%. (After December 31, 2019, the maximum default deferral percentage increases to 15%.)

It must be at least 3% in the first plan year it applies to an employee and through the end of the following year.

It must increase to at least 4% in the following plan year.

It must increase to at least 5% in the following plan year.

It must increase to at least 6% in subsequent plan years.

Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms.

Matching contributions. You must make matching contributions on behalf of each non-highly compensated employee in the following amounts.

An amount equal to 100% of elective deferrals, up to 1% of compensation.

An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation.

Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees.

Nonelective contributions. You must make nonelective contributions on behalf of every non-highly compensated employee eligible to participate in the plan, regardless of whether they elected to participate, in an amount equal to at least 3% of their compensation.

All accrued benefits attributed to matching or nonelective contributions under the QACA must be 100% vested for all employees who complete 2 years of service. These contributions are subject to special withdrawal restrictions, discussed later.

Each employee eligible to participate in the QACA must receive written notice of their rights and obligations under the QACA within a reasonable period before each plan year. The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. The notice must explain their right to elect not to have elective contributions made on their behalf, or to have contributions made at a different percentage than the default percentage. Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. The employee must have a reasonable period of time after receiving the notice to make such contribution and investment elections prior to the first contributions under the QACA.

If you make nonelective contributions under the QACA and you either don't make any matching contributions or you make matching contributions that are intended to satisfy the ACP test, then this QACA notice requirement doesn’t apply. However, this exception doesn’t apply to the EACA notice requirement, earlier.

Treatment of Excess Deferrals

If the total of an employee's deferrals is more than the limit for 2023, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. The employee must notify the plan by April 15, 2024 (or an earlier date specified in the plan), of the amount to be paid from each plan. The plan must then pay the employee that amount, plus earnings on the amount through the end of 2023, by April 15, 2024.

If the employee takes out the excess deferral by April 15, 2024, it isn't reported again by including it in the employee's gross income for 2024. However, any income earned in 2023 on the excess deferral taken out is taxable in the tax year in which it is taken out. The distribution isn't subject to the additional 10% tax on early distributions.

If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income.

Even if the employee takes out the excess deferral by April 15, the amount will be considered for purposes of nondiscrimination testing requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans.

If the employee doesn't take out the excess deferral by April 15, 2024, the excess, though taxable in 2023, isn't included in the employee's cost basis in figuring the taxable amount of any eventual distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the employee's excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan can be disqualified.

Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498.

The law provides tests to detect discrimination in a plan. If tests, such as the ADP test (see section 401(k)(3)) and the ACP test (see section 401(m)(2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. Report the tax on Form 5330. The ADP test doesn't apply to a safe harbor 401(k) plan (discussed next) or to a QACA. Also, the ACP test doesn't apply to these plans if certain additional requirements are met.

The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test.

See Regulations sections 1.401(k)-2 and 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m).

If you meet the requirements for a safe harbor 401(k) plan, you don't have to satisfy the ADP test or the ACP test if certain additional requirements are met. For your plan to be a safe harbor plan, you must meet the following conditions.

Matching or nonelective contributions. You must make matching or nonelective contributions according to one of the following formulas.

Matching contributions. You must make matching contributions according to the following rules.

You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation.

You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation.

The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees.

Nonelective contributions. You must make nonelective contributions, without regard to whether the employee made elective deferrals, on behalf of all non-highly compensated employees eligible to participate in the plan, equal to at least 3% of the employee's compensation.

These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions.

Notice requirement. You must give eligible employees written notice of their rights and obligations with regard to contributions under the plan within a reasonable period before the plan year.

If you make nonelective contributions and you either don't make any matching contributions or you make matching contributions that are intended to satisfy the ACP test, then this notice requirement doesn’t apply. However, this exception doesn’t apply to the EACA notice requirement, earlier.

The other requirements for a 401(k) plan, including withdrawal and vesting rules, must also be met for your plan to qualify as a safe harbor 401(k) plan.

Qualified Roth Contribution Program

Under this program, an eligible employee can designate all or a portion of their elective deferrals as after-tax Roth contributions. These contributions, which are made in lieu of elective deferrals, are designated Roth contributions. Unlike other elective deferrals, designated Roth contributions aren't excluded from an employee's gross income.

In addition, an eligible employee may be permitted to designate certain nonelective contributions or matching contributions as Roth contributions. These contributions are also includible in an employee's gross income.

Designated Roth contributions, designated Roth nonelective contributions, and designated Roth matching contributions must be maintained in a separate Roth account. However, qualified distributions from a Roth account are excluded from an employee's gross income.

Under a qualified Roth contribution program, the amount of elective deferrals that an employee may designate as a Roth contribution is limited to the maximum amount of elective deferrals excludable from gross income for the year (for 2023, $22,500 if under age 50 and $30,000 if age 50 or over; amounts increase in 2024 to $23,000 and $30,500, respectively) less the total amount of the employee's elective deferrals not designated as Roth contributions.

Designated Roth contributions are treated the same as pre-tax elective deferrals for most purposes, including:

The annual individual elective deferral limit (total of all designated Roth contributions and traditional, pre-tax elective deferrals) of $22,500 for 2023 ($23,000 for 2024), with an additional $7,500 if age 50 or over;

Determining the maximum employee and employer annual contributions of the lesser of 100% of compensation or $66,000 for 2023 ($69,000 for 2024);

Nondiscrimination testing;

Required distributions; and

Elective deferrals not taken into account for purposes of deduction limits.

Qualified Distributions

A qualified distribution is a distribution that is made after the employee's nonexclusion period and:

On or after the employee reaches age 59½,

On account of the employee's being disabled, or

On or after the employee's death.

An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years.

The first tax year in which a contribution was made to their Roth account in the plan.

If a rollover contribution was made to the employee's designated Roth account from a designated Roth account previously established for the employee under another plan, then the first tax year the employee made a designated Roth contribution to the previously established account.

A rollover from another account can be made to a designated Roth account in the same plan. For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I.R.B. 872, available at IRS.gov/irb/2010-51_IRB/ar11.html ; and Notice 2013-74, 2013-52 I.R.B. 819, available at IRS.gov/pub/irs-irbs/irb13-52_IRB . A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. Rollover amounts don't apply toward the annual deferral limit.

You must report a designated Roth contribution on Form W-2. See the Form W-2 instructions for detailed information.

You must report a designated Roth nonelective contribution or a designated Roth matching contribution on Form 1099-R for the year in which the contribution is allocated. You must also report a distribution from a Roth account on Form 1099-R. See the Form 1099-R instructions

Amounts paid to plan participants from a qualified plan are called distributions. Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. Also, certain loans may be treated as distributions. See Loans Treated as Distributions in Pub. 575.

Required Distributions

A qualified plan must provide that each participant will either:

Receive their entire interest (benefits) in the plan by the required beginning date (defined later), or

Begin receiving regular periodic distributions by the required beginning date in annual amounts figured to distribute the participant's entire interest (benefits) over their life expectancy or over the joint life expectancies of the participant and the designated beneficiary (or over a shorter period).

These distribution rules apply individually to each qualified plan. You can't satisfy the requirement for one plan by taking a distribution from another. The plan must provide that these rules override any inconsistent distribution options previously offered.

If the account balance of a qualified plan participant is to be distributed (other than as an annuity), the plan administrator must figure the minimum amount required to be distributed each distribution calendar year. This minimum is figured by dividing the account balance by the applicable life expectancy. The plan administrator can use the life expectancy tables in Pub. 590-B for this purpose. For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Pub. 575.

Generally, each participant must receive their entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the required beginning date.

A participant must begin to receive distributions from their qualified retirement plan by April 1 of the first year after the later of the following years.

The calendar year in which the participant reaches age 72 (if age 70½ was reached after December 31, 2019).

The calendar year in which he or she retires from employment with the employer maintaining the plan.

If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reached age 72 (if age 70½ was reached after December 31, 2019). For more information, see Tax on Excess Accumulation in Pub. 575 about distributions prior to 2020.

Individuals who reach age 72 after December 31, 2022, may delay receiving their required minimum distribution until April 1 of the year following the year in which they reach age 73.

The distribution required to be made by April 1 is treated as a distribution for the starting year. (The starting year is the year in which the participant meets (1) or (2) above, whichever applies.) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31).

See Pub. 575 for the special rules covering distributions made after the death of a participant.

Distributions From 401(k) Plans

Generally, distributions can't be made until one of the following occurs.

The employee retires, dies, becomes disabled, or otherwise severs employment.

The plan ends and no other defined contribution plan is established or continued.

In the case of a 401(k) plan that is part of a profit-sharing plan, the employee reaches age 59½ or suffers financial hardship. For the rules on hardship distributions, including the limits on them, see Regulations section 1.401(k)-1(d).

The employee becomes eligible for a qualified reservist distribution (defined next).

A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. All or part of a qualified reservist distribution can be repaid to an IRA. The additional 10% tax on early distributions doesn't apply to a qualified reservist distribution.

Tax Treatment of Distributions

Distributions from a qualified plan minus a prorated part of any cost basis are subject to income tax in the year they are distributed. Because most recipients have no cost basis, a distribution is generally fully taxable. An exception is a distribution that is properly rolled over as discussed under Rollover next.

The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. See Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Pub. 575 for a detailed description of how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution.

A recipient of a distribution from a designated Roth account will have a cost basis because designated Roth contributions are made on an after-tax basis. Also, a distribution from a designated Roth account is entirely tax free if certain conditions are met. See Qualified distributions under Qualified Roth Contribution Program , earlier.

The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by rolling it over into a traditional IRA or another eligible retirement plan. However, it may be subject to withholding, as discussed under Withholding requirement , later. A rollover can also be made to a Roth IRA, in which case any previously untaxed amounts are includible in gross income unless the rollover is from a designated Roth account.

This is a distribution of all or any part of an employee's balance in a qualified retirement plan that isn't any of the following.

An RMD. See Required Distributions , earlier.

Any of a series of substantially equal payments made at least once a year over any of the following periods.

The employee's life or life expectancy.

The joint lives or life expectancies of the employee and beneficiary.

A period of 10 years or longer.

A hardship distribution.

Loans treated as distributions.

Dividends on employer securities.

The cost of any life insurance coverage provided under a qualified retirement plan.

Similar items designated by the IRS in published guidance. See, for example, the Instructions for Forms 1099-R and 5498.

You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a section 403(b) plan, or to an IRA. If the rollover is to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover, the transfer must be made through a direct (trustee-to-trustee) rollover. If the rollover is to an IRA, the transfer can be made by any rollover method.

A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. If the rollover is to a Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee).

For more information about rollovers, see Rollovers in Pubs. 575 and 590-A. For rules on rolling over distributions that contain nontaxable amounts, see Notice 2014-54, 2014-41 I.R.B. 670, available at IRS.gov/irb/2014-41_IRB/ar11.html . For guidance on rolling money into a qualified plan, see Revenue Ruling 2014-9, 2014-17 I.R.B. 975, available at IRS.gov/irb/2014-17_IRB/ar05.html .

If, during a year, a qualified plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to total $200 or more, the payor must withhold 20% of the taxable portion of each distribution for federal income tax.

If, instead of having the distribution paid to them, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct rollover ), no withholding is required.

If the distribution isn't an eligible rollover distribution, defined earlier, the 20% withholding requirement doesn't apply. Other withholding rules apply to distributions that aren't eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). However, the participant can choose not to have tax withheld from these distributions. If the participant doesn't make this choice, the following withholding rules apply.

For periodic distributions, withholding is based on their treatment as wages.

For nonperiodic distributions, 10% of the taxable part is withheld.

If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. For more information, see Withholding Tax and Estimated Tax in Pub. 575.

If a distribution is an eligible rollover distribution, as defined earlier, you must provide a written notice to the recipient that explains the following rules regarding such distributions.

That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer.

That tax will be withheld from the distribution if it isn't directly transferred to an eligible retirement plan.

That the distribution won't be subject to tax if transferred to an eligible retirement plan within 60 days after the date the recipient receives the distribution.

Certain other rules that may be applicable.

Notice 2020-62, 2020-35 I.R.B. 476, available at, IRS.gov/irb/2023–15_IRB , contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions.

The notice must generally be provided no less than 30 days and no more than 180 days before the date of a distribution.

The written notice must be provided individually to each distributee of an eligible rollover distribution. Posting of the notice isn't sufficient. However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. See Regulations section 1.401(a)-21.

Failure to give a 402(f) notice will result in a tax of $100 for each failure, with a total not exceeding $50,000 per calendar year. The tax won't be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect.

Tax on Early Distributions

If a distribution is made to an employee under the plan before they reache age 59½, the employee may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that the employee must include in income.

The 10% tax won't apply if distributions before age 59½ are made in any of the following circumstances.

Made to a beneficiary (or to the estate of the employee) on or after the death of the employee.

Made due to the employee having a qualifying disability.

Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and their designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.)

Made to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached age 55.

Made to an alternate payee under a QDRO.

Made to an employee for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the employee itemizes deductions).

Timely made to reduce excess contributions under a 401(k) plan.

Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions).

Timely made to reduce excess elective deferrals.

Made because of an IRS levy on the plan.

Made as a qualified reservist distribution.

Made as a permissible withdrawal from an EACA.

Made as a qualified birth or adoption distribution.

Made as a qualified disaster distribution.

Made to an individual who has been certified by a physician as having a terminal illness.

Timely made to reduce excess IRA contributions pursuant to section 408(d)(4).

To report the tax on early distributions, file Form 5329. See the form instructions for additional information about this tax.

Tax on Excess Benefits

If you are or have been a 5% owner of the business maintaining the plan, amounts you receive at any age that are more than the benefits provided for you under the plan formula are subject to an additional tax. This tax also applies to amounts received by your successor. The tax is 10% of the excess benefit includible in income.

To determine whether or not you are a 5% owner, see section 416.

Include on Schedule 2 (Form 1040), line 8, any tax you owe for an excess benefit. Check box 8c and, on the line next to it, enter “Sec. 72(m)(5)” and enter the amount of the tax.

The amount subject to the additional tax isn't eligible for the optional methods of figuring income tax on a lump-sum distribution. The optional methods are discussed under Lump-Sum Distributions in Pub. 575.

A 20% or 50% excise tax is generally imposed on the cash and fair market value of other property an employer receives directly or indirectly from a qualified plan. If you owe this tax, report it on Schedule I of Form 5330. See the form instructions for more information.

An employer or the plan will have to pay an excise tax if both of the following occur.

A defined benefit plan or money purchase pension plan is amended to provide for a significant reduction in the rate of future benefit accrual.

The plan administrator fails to notify the affected individuals and the employee organizations representing them of the reduction in writing.

A plan amendment that eliminates or reduces any early retirement benefit or retirement-type subsidy reduces the rate of future benefit accrual.

The notice must be written in a manner calculated to be understood by the average plan participant and must provide enough information to allow each individual to understand the effect of the plan amendment. It must be provided within a reasonable time before the amendment takes effect.

The tax is $100 per participant or alternate payee for each day the notice is late. The total tax can't be more than $500,000 during the tax year. It is imposed on the employer or, in the case of a multiemployer plan, on the plan.

Prohibited Transactions

Prohibited transactions are transactions between the plan and a disqualified person that are prohibited by law. (However, see Exemption later.) If you are a disqualified person who takes part in a prohibited transaction, you must pay a tax (discussed later).

Prohibited transactions generally include the following transactions.

A transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person.

Any act of a fiduciary by which they deal with plan income or assets in the fiduciary own interest.

The receipt of consideration by a fiduciary for their own account from any party dealing with the plan in a transaction that involves plan income or assets.

Any of the following acts between the plan and a disqualified person.

Selling, exchanging, or leasing property.

Lending money or extending credit.

Furnishing goods, services, or facilities.

Certain transactions are exempt from being treated as prohibited transactions. For example, a prohibited transaction doesn't take place if you are a disqualified person and receive any benefit to which you are entitled as a plan participant or beneficiary. However, the benefit must be figured and paid under the same terms as for all other participants and beneficiaries. For other transactions that are exempt, see section 4975 and the related regulations.

You are a disqualified person if you are any of the following.

A fiduciary of the plan.

A person providing services to the plan.

An employer, any of whose employees are covered by the plan.

An employee organization, any of whose members are covered by the plan.

Any direct or indirect owner of 50% or more of any of the following.

The combined voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of a corporation that is an employer or employee organization described in (3) or (4).

The capital interest or profits interest of a partnership that is an employer or employee organization described in (3) or (4).

The beneficial interest of a trust or unincorporated enterprise that is an employer or an employee organization described in (3) or (4).

A member of the family of any individual described in (1), (2), (3), or (5). (A member of a family is the spouse, ancestor, or lineal descendant, or any spouse of a lineal descendant.)

A corporation, partnership, trust, or estate of which (or in which) any direct or indirect owner described in (1) through (5) holds 50% or more of any of the following.

The combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation.

The capital interest or profits interest of a partnership.

The beneficial interest of a trust or estate.

An officer, a director (or an individual having powers or responsibilities similar to those of officers or directors), a 10%-or more shareholder, or a highly compensated employee (earning 10%-or-more of the yearly wages of an employer) of a person described in (3), (4), (5), or (7).

A 10%-or more (in capital or profits) partner or joint venturer of a person described in (3), (4), (5), or (7).

Any disqualified person, as described in (1) through (9) above, who is a disqualified person with respect to any plan to which a section 501(c)(22) trust is permitted to make payments under section 4223 of ERISA.

Tax on Prohibited Transactions

The initial tax on a prohibited transaction is 15% of the amount involved for each year (or part of a year) in the tax period. If the transaction isn't corrected within the tax period, an additional tax of 100% of the amount involved is imposed. For information on correcting the transaction, see Correcting a prohibited transaction , later.

Both taxes are payable by any disqualified person who participated in the transaction (other than a fiduciary acting only as such). If more than one person takes part in the transaction, each person can be jointly and severally liable for the entire tax.

The amount involved in a prohibited transaction is the greater of the following amounts.

The money and fair market value of any property given.

The money and fair market value of any property received.

If services are performed, the amount involved is any excess compensation given or received.

The tax period starts on the transaction date and ends on the earliest of the following days.

The day the IRS mails a notice of deficiency for the tax.

The day the IRS assesses the tax.

The day the correction of the transaction is completed.

Pay the 15% tax with Form 5330.

If you are a disqualified person who participated in a prohibited transaction, you can avoid the 100% tax by correcting the transaction as soon as possible. Correcting the transaction means undoing it as much as you can without putting the plan in a worse financial position than if you had acted under the highest fiduciary standards.

If the prohibited transaction isn't corrected during the tax period, you usually have an additional 90 days after the day the IRS mails a notice of deficiency for the 100% tax to correct the transaction. This correction period (the tax period plus the 90 days) can be extended if either of the following occurs.

The IRS grants reasonable time needed to correct the transaction.

You petition the Tax Court.

You may have to file an annual return/report by the last day of the seventh month after the plan year ends. See the following list of forms to choose the right form for your plan.

Form 5500-SF is a simplified annual reporting form. You can use Form 5500-SF if the plan meets all the following conditions.

The plan is a small plan (generally, fewer than 100 participants at the beginning of the plan year).

The plan meets the conditions for being exempt from the requirements that the plan's books and records be audited by an independent qualified public accountant.

The plan has 100% of its assets invested in certain secure investments with a readily determinable fair value.

The plan holds no employer securities.

The plan isn't a multiemployer plan.

If your plan is required to file an annual return/report but isn't eligible to file Form 5500-SF, the plan must file Form 5500 or 5500-EZ, as appropriate. For more details, see the Instructions for Form 5500-SF.

You may be able to use Form 5500-EZ if the plan is a one-participant plan, as defined below.

Your plan is a one-participant plan if either of the following is true.

The plan covers only you (or you and your spouse) and you (or you and your spouse) own the entire business (whether incorporated or unincorporated).

The plan covers only one or more partners (or partner(s) and spouse(s)) in a business partnership.

If your one-participant plan (or plans) had total assets of $250,000 or less at the end of the plan year, then you don't have to file Form 5500-EZ for that plan year. All plans should file a Form 5500-EZ for the final plan year to show that all plan assets have been distributed.

You are a sole proprietor and your plan meets all the conditions for filing Form 5500-EZ. The total plan assets are more than $250,000. You must file Form 5500-EZ or 5500-SF.

If you don't meet the requirements for filing Form 5500-EZ or 5500-SF and a return/report is required, you must file Form 5500.

All Forms 5500 and 5500-SF are required to be filed electronically with the Department of Labor through EFAST2. One-participant plans have the option of filing Form 5500-SF electronically rather than filing a Form 5500-EZ on paper with the IRS. For more information, see the instructions for Forms 5500 and 5500-SF, available at EFAST.dol.gov .

If you terminate your plan and are the plan sponsor or plan administrator, you can file Form 5310. Your application must be accompanied by the appropriate user fee and Form 8717.

Form 8955-SSA is used to report participants who are no longer covered by the plan but have a deferred vested benefit under the plan.

Form 8955-SSA is filed with the IRS and can be filed electronically through the FIRE (Filing Information Returns Electronically) system.

For more information about reporting requirements, see the forms and their instructions.

5. Table and Worksheets for the Self-Employed

As discussed in chapters 2 and 4, if you are self-employed, you must use the rate table or rate worksheet and deduction worksheet to figure your deduction for contributions you made for yourself to a SEP-IRA or qualified plan.

First, use either the rate table or rate worksheet to find your reduced contribution rate. Then, complete the deduction worksheet to figure your deduction for contributions.

If your plan's contribution rate is a whole percentage (for example, 12% rather than 12½%), you can use the Rate Table for Self-Employed on the next page to find your reduced contribution rate. Otherwise, use the Rate Worksheet for Self-Employed provided below.

First, find your plan contribution rate (the contribution rate stated in your plan) in Column A of the table. Then, read across to the rate under Column A. Enter the rate from Columnin step 4 of the Deduction Worksheet for Self-Employed on this page.

You are a sole proprietor with no employees. If your plan's contribution rate is 10% of a participant's compensation, your rate is 0.090909. Enter this rate on step 4 of the Deduction Worksheet for Self-Employed on this page.

Deduction Worksheet for Self-Employed

If your plan's contribution rate isn't a whole percentage (for example, 10½%), you can't use the Rate Table for Self-Employed. Use the following worksheet instead.

Rate Worksheet for Self-Employed

Now that you have your self-employed rate from either the rate table or rate worksheet, you can figure your maximum deduction for contributions for yourself by completing the Deduction Worksheet for Self-Employed.

If you reside in a community property state and you are married and filing a separate return, disregard community property laws for step 1 of the Deduction Worksheet for Self-Employed. Enter on step 1 the total net profit you actually earned.

Rate Table for Self-Employed

You are a sole proprietor with no employees. The terms of your plan provide that you contribute 8½% (0.085) of your compensation to your plan. Your net profit from Schedule C (Form 1040), line 31, is $200,000. You have no elective deferrals or catch-up contributions. Your self-employment tax deduction on line 15 of Schedule 1 (Form 1040) is $11,792. See the filled-in portions of both Schedule SE (Form 1040), and Form 1040, later.

You figure your self-employed rate and maximum deduction for employer contributions you made for yourself as follows.

See the filled-in Deduction Worksheet for Self-Employed later.

Portion of Form 1040 and Portion of Schedule SE

Portions of Schedule SE (Form 1040) and Schedule 1 (Form 1040)

Summary: These are portions of Schedule S.E. (Form 1040) and Form 1040 (2004) as pertains to the description in the text. The completed line items are:

Please click here for the text description of the image.

6. How To Get Tax Help

If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov to find resources that can help you right away.

After receiving all your wage and earnings statements (Forms W-2, W-2G, 1099-R, 1099-MISC, 1099-NEC, etc.); unemployment compensation statements (by mail or in a digital format) or other government payment statements (Form 1099-G); and interest, dividend, and retirement statements from banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you qualify for free tax preparation, or hire a tax professional to prepare your return.

Your options for preparing and filing your return online or in your local community, if you qualify, include the following.

Free File. This program lets you prepare and file your federal individual income tax return for free using software or Free File Fillable Forms. However, state tax preparation may not be available through Free File. Go to IRS.gov/FreeFile to see if you qualify for free online federal tax preparation, e-filing, and direct deposit or payment options.

VITA. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people with low-to-moderate incomes, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their own tax returns. Go to IRS.gov/VITA , download the free IRS2Go app, or call 800-906-9887 for information on free tax return preparation.

TCE. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. Go to IRS.gov/TCE , download the free IRS2Go app, or call 888-227-7669 for information on free tax return preparation.

MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource. For more information, go to MilitaryOneSource (MilitaryOneSource.Mil/Tax ).

Also, the IRS offers Free Fillable Forms, which can be completed online and then e-filed regardless of income.

Go to IRS.gov/Tools for the following.

The Earned Income Tax Credit Assistant ( IRS.gov/EITCAssistant ) determines if you’re eligible for the earned income credit (EIC).

The Online EIN Application ( IRS.gov/EIN ) helps you get an employer identification number (EIN) at no cost.

The Tax Withholding Estimator ( IRS.gov/W4App ) makes it easier for you to estimate the federal income tax you want your employer to withhold from your paycheck. This is tax withholding. See how your withholding affects your refund, take-home pay, or tax due.

The First-Time Homebuyer Credit Account Look-up ( IRS.gov/HomeBuyer ) tool provides information on your repayments and account balance.

The Sales Tax Deduction Calculator ( IRS.gov/SalesTax ) figures the amount you can claim if you itemize deductions on Schedule A (Form 1040).

IRS.gov/Help : A variety of tools to help you get answers to some of the most common tax questions.

IRS.gov/ITA : The Interactive Tax Assistant, a tool that will ask you questions and, based on your input, provide answers on a number of tax law topics.

IRS.gov/Forms : Find forms, instructions, and publications. You will find details on the most recent tax changes and interactive links to help you find answers to your questions.

You may also be able to access tax information in your e-filing software.

There are various types of tax return preparers, including enrolled agents, certified public accountants (CPAs), accountants, and many others who don’t have professional credentials. If you choose to have someone prepare your tax return, choose that preparer wisely. A paid tax preparer is:

Primarily responsible for the overall substantive accuracy of your return,

Required to sign the return, and

Required to include their preparer tax identification number (PTIN).

The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure online W-2 filing options to CPAs, accountants, enrolled agents, and individuals who process Form W-2, Wage and Tax Statement, and Form W-2c, Corrected Wage and Tax Statement.

Go to IRS.gov/SocialMedia to see the various social media tools the IRS uses to share the latest information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our highest priority. We use these tools to share public information with you. Don’t post your social security number (SSN) or other confidential information on social media sites. Always protect your identity when using any social networking site.

The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, Spanish, and ASL.

Youtube.com/irsvideos .

Youtube.com/irsvideosmultilingua .

Youtube.com/irsvideosASL .

The IRS Video portal ( IRSVideos.gov ) contains video and audio presentations for individuals, small businesses, and tax professionals.

You can find information on IRS.gov/MyLanguage if English isn’t your native language.

The IRS is committed to serving taxpayers with limited-English proficiency (LEP) by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), other IRS offices, and every VITA/TCE return site. The OPI Service is accessible in more than 350 languages.

Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and future accessibility products and services available in alternative media formats (for example, braille, large print, audio, etc.). The Accessibility Helpline does not have access to your IRS account. For help with tax law, refunds, or account-related issues, go to IRS.gov/LetUsHelp .

Form 9000, Alternative Media Preference, or Form 9000(SP) allows you to elect to receive certain types of written correspondence in the following formats.

Standard Print.

Large Print.

Audio (MP3).

Plain Text File (TXT).

Braille Ready File (BRF).

Go to IRS.gov/DisasterRelief to review the available disaster tax relief.

Go to IRS.gov/Forms to view, download, or print all of the forms, instructions, and publications you may need. Or you can go to IRS.gov/OrderForms to place an order.

Download and view most tax publications and instructions (including the Instructions for Form 1040) on mobile devices as eBooks at IRS.gov/eBooks .

IRS eBooks have been tested using Apple's iBooks for iPad. Our eBooks haven’t been tested on other dedicated eBook readers, and eBook functionality may not operate as intended.

Go to IRS.gov/Account to securely access information about your federal tax account.

View the amount you owe and a breakdown by tax year.

See payment plan details or apply for a new payment plan.

Make a payment or view 5 years of payment history and any pending or scheduled payments.

Access your tax records, including key data from your most recent tax return, and transcripts.

View digital copies of select notices from the IRS.

Approve or reject authorization requests from tax professionals.

View your address on file or manage your communication preferences.

With an online account, you can access a variety of information to help you during the filing season. You can get a transcript, review your most recently filed tax return, and get your adjusted gross income. Create or access your online account at IRS.gov/Account .

This tool lets your tax professional submit an authorization request to access your individual taxpayer IRS online account. For more information, go to IRS.gov/TaxProAccount .

The safest and easiest way to receive a tax refund is to e-file and choose direct deposit, which securely and electronically transfers your refund directly into your financial account. Direct deposit also avoids the possibility that your check could be lost, stolen, destroyed, or returned undeliverable to the IRS. Eight in 10 taxpayers use direct deposit to receive their refunds. If you don’t have a bank account, go to IRS.gov/DirectDeposit for more information on where to find a bank or credit union that can open an account online.

Tax-related identity theft happens when someone steals your personal information to commit tax fraud. Your taxes can be affected if your SSN is used to file a fraudulent return or to claim a refund or credit.

The IRS doesn’t initiate contact with taxpayers by email, text messages (including shortened links), telephone calls, or social media channels to request or verify personal or financial information. This includes requests for personal identification numbers (PINs), passwords, or similar information for credit cards, banks, or other financial accounts.

Go to IRS.gov/IdentityTheft , the IRS Identity Theft Central webpage, for information on identity theft and data security protection for taxpayers, tax professionals, and businesses. If your SSN has been lost or stolen or you suspect you’re a victim of tax-related identity theft, you can learn what steps you should take.

Get an Identity Protection PIN (IP PIN). IP PINs are six-digit numbers assigned to eligible taxpayers to help prevent the misuse of their SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return with your SSN. To learn more, go to IRS.gov/IPPIN .

Go to IRS.gov/Refunds .

Download the official IRS2Go app to your mobile device to check your refund status.

Call the automated refund hotline at 800-829-1954.

Payments of U.S. tax must be remitted to the IRS in U.S. dollars. Digital assets are not accepted. Go to IRS.gov/Payments for information on how to make a payment using any of the following options.

IRS Direct Pay : Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.

Debit Card, Credit Card, or Digital Wallet : Choose an approved payment processor to pay online or by phone.

Electronic Funds Withdrawal : Schedule a payment when filing your federal taxes using tax return preparation software or through a tax professional.

Electronic Federal Tax Payment System : Best option for businesses. Enrollment is required.

Check or Money Order : Mail your payment to the address listed on the notice or instructions.

Cash : You may be able to pay your taxes with cash at a participating retail store.

Same-Day Wire : You may be able to do same-day wire from your financial institution. Contact your financial institution for availability, cost, and time frames.

The IRS uses the latest encryption technology to ensure that the electronic payments you make online, by phone, or from a mobile device using the IRS2Go app are safe and secure. Paying electronically is quick, easy, and faster than mailing in a check or money order.

Go to IRS.gov/Payments for more information about your options.

Apply for an online payment agreement ( IRS.gov/OPA ) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved.

Use the Offer in Compromise Pre-Qualifier to see if you can settle your tax debt for less than the full amount you owe. For more information on the Offer in Compromise program, go to IRS.gov/OIC .

Go to IRS.gov/Form1040X for information and updates.

Go to IRS.gov/WMAR to track the status of Form 1040-X amended returns.

Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

You can now upload responses to all notices and letters using the Document Upload Tool. For notices that require additional action, taxpayers will be redirected appropriately on IRS.gov to take further action. To learn more about the tool, go to IRS.gov/Upload .

You can use Schedule LEP (Form 1040), Request for Change in Language Preference, to state a preference to receive notices, letters, or other written communications from the IRS in an alternative language. You may not immediately receive written communications in the requested language. The IRS’s commitment to LEP taxpayers is part of a multi-year timeline that began providing translations in 2023. You will continue to receive communications, including notices and letters, in English until they are translated to your preferred language.

Keep in mind, many questions can be answered on IRS.gov without visiting an IRS TAC. Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment, so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC and to check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate Service (TAS) Is Here To Help You

TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights .

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

Your problem is causing financial difficulty for you, your family, or your business;

You face (or your business is facing) an immediate threat of adverse action; or

You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.

TAS has offices in every state, the District of Columbia, and Puerto Rico . To find your advocate’s number:

Go to TaxpayerAdvocate.IRS.gov/Contact-Us ;

Download Pub. 1546, The Taxpayer Advocate Service Is Your Voice at the IRS, available at IRS.gov/pub/irs-pdf/p1546.pdf ;

Call the IRS toll free at 800-TAX-FORM (800-829-3676) to order a copy of Pub. 1546;

Check your local directory; or

Call TAS toll free at 877-777-4778.

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, report it to TAS at IRS.gov/SAMS . Be sure to not include any personal taxpayer information.

LITCs are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and need to resolve tax problems with the IRS, such as audits, appeals, and tax collection disputes. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee for eligible taxpayers. To find an LITC near you, go to TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134, Low Income Taxpayer Clinic List , at IRS.gov/pub/irs-pdf/p4134.pdf .

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Tax changes small business owners should be aware of as the tax deadline looms

FILE - A cash register is seen on the front counter at the Alpha Shoe Repair Corp., Feb. 3, 2023, in New York. As Tax Day, April 15, approaches, there are plenty of things small business owners should keep in mind when filing taxes this year. (AP Photo/Mary Altaffer, File)

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As Tax Day approaches, there are plenty of things small business owners should keep in mind when filing taxes this year.

April 15 is still the annual tax deadline for many small businesses although, unlike individuals, small businesses can have varying deadlines depending on the type of company, the state the taxes are filed in, and other factors. Quarterly estimated tax payments are generally required throughout the year. And certain types of small businesses had to file by March 15.

Since business tax filing is complex, most experts recommend small business owners work with a professional tax adviser rather than trying to file on their own or even with tax-filing software.

“Taxes should not be scary, especially when you have a certified tax professional or someone who is your trusted adviser,” said Amber Kellogg, vice president of affiliate origination and management at business consultancy Occams Advisory. “I always say you don’t go to the dentist to get your oil changed, and you certainly shouldn’t do (taxes) yourself unless you’re an expert.”

But even if small business owners aren’t filing taxes themselves, it’s still important to stay informed about any tax changes during the year. Here are things small business owners should consider as the April 15 deadline looms.

Consider an extension

Because of some pending tax legislation in Congress this year, Mitch Gerstein, senior tax adviser at accounting firm Isdaner & Co., said it might be a good idea to file for an extension. When you file an extension you still pay estimated taxes, but final paperwork isn’t due until September.

This gives your tax provider adequate time to file a return. And it’s cheaper to file an extension than an amended return, which costs more in administrative fees.

One reason Gerstein recommends an extension this year: a bonus depreciation write-off used by many small businesses is set to decrease for 2023. The bonus depreciation allowance was designed to spur capital purchases and it let businesses write off 100% of certain new and used assets in 2022. But beginning in 2023, that will decrease to 80% for used assets, dropping another 20% each year thereafter. However, a tax bill pending in Congress could restore the write-off to 100%. It’s rare that there is such a significant tax bill pending in Congress when taxes are due, Gerstein said.

Optimize your retirement plan

The Secure Act 2.0 passed by Congress in late 2022 gives small businesses some tax advantages if they offer a retirement plan. There’s a tax credit for small businesses starting new employee plans. The credit is up to 100% of the startup costs for adopting and maintaining a new 401(k) plan, capped at $5,000. There’s also a tax credit based on employer contribution, up to $1,000 annually per employee, over the plan’s first five years.

Changes in research and development write-offs

Scott Orn, chief operating officer of Kruze Consulting, works with startups backed by venture capital. Orn said the number one concern his clients are calling about is “Section 174,” a part of the tax code that involves writing off research and development costs.

In the past, companies were able to deduct 100% of research and development expenses from their taxable income. That was helpful because often that deduction meant the company was operating at a loss and wouldn’t have to pay taxes.

But starting in 2022 due to new legislation, companies have had to “capitalize” the expense – or spread it out over several years. That means they must now write off the expenses over five years for U.S.-based R&D, or 15 years for foreign R&D expenses.

Large and small companies alike are affected by the change, but small businesses are hurt the most, Orn said.

“(Small businesses) are the ones who are swinging into profit where they thought they were like safely losing money and not ever going to pay taxes for a while,” Orn said. “And that’s why it’s such a big surprise for them. It’s hurting people, it’s like it’s a lot of money these companies don’t have.”

Avoid underpayment penalties

Yet another reason for small business owners to use a tax professional is the fact that underpaying will cost more this year. In the past, underpayment penalties hovered at around 3%, but this year they’re more than double at 8% . That’s because the penalties are based on the federal short term interest rate plus three points, said Danny Castro, Florida Market Tax Leader at BDO USA, part of BDO Global, a global accounting network.

“The cost of underpayment is as high as it’s been in a long time,” he said.

One credit to skip: the ERC

At one time, the pandemic-era Employee Retention Credit seemed like a boon for small businesses. Designed to help small businesses keep employees during pandemic-era shutdowns, the generous credit let businesses file amended tax returns to claim the credit.

But that led to a cottage industry of scammers trying to entice small businesses to help them file for the credit – for a fee – even if they didn’t qualify. The IRS has launched several initiatives to claw back some money improperly given to businesses. To date, the IRS said 500 taxpayers have given back $225 million via a voluntary disclosure program, which ended on March 22, that let small businesses who thought they received the credit in error give back the money and keep 20%. And 1,800 businesses have withdrawn unprocessed claims totaling $251 million.

Get organized, stay organized

The best thing small businesses can do to help their tax advisers file their taxes is stay organized. A shoe box full of receipts isn’t helpful when trying to file timely taxes. Owners should log receipts in an orderly database they can turn over to their adviser. And stay on top of quarterly estimated payments.

“(Small business owners) need to be able to keep accurate records throughout the year and not have to go back in April and go, gosh, what what was this receipt for,” said Occams Advisory’s Amber Kellogg, “Keeping those, accurate records is very, very important.”

This story has been corrected to show that BDO USA is part of BDO Global, not BBO Global.

7 Tax Mistakes That Can Cost Small Business Owners Thousands

T ax season is a good time for small business owners to reflect upon their past year's business performance, and plan ahead for next year. As part of your tax planning, it's important to watch out for a few big tax mistakes. Small business owners work too hard to lose money to unnecessary taxes or bookkeeping mistakes. These tax mistakes could be separating you from too many of your hard-earned dollars -- and undermining your long-term financial wellness -- in your business and personal finances.

Let's look at a few big tax mistakes that any freelancer, solopreneur, or small business owner should aim to avoid.

Read more: we researched free tax software and put together a list of the best options here

1. Not separating your business and personal finances

Even if you're in the early days of starting a business, even if it's just a side hustle, try to separate your business income and expenses from your personal finances. Don't pay vendors from a personal checking account. Don't use business bank accounts for personal expenses.

If you do not have a clear, separate financial identity for your business and personal finances, you're making life harder for yourself. If your business and personal funds are intermingled, this makes it harder to keep track of your legitimate tax-deductible business expenses. You might forget to deduct hundreds of dollars that could've saved you money on taxes. Or worse -- you could try to deduct something that shouldn't be deducted, and end up making yourself vulnerable to an IRS audit.

2. Not tracking your business expenses

Too many small business owners get so excited about running the business that they get sloppy about bookkeeping. And there's no excuse for this anymore! There's so much great small business accounting software available now. It's easier than ever before to keep track of your deductible business expenses all year round, month after month.

And good business bookkeeping is not just about taxes or tracking expenses: it's a way to keep an eye on your business's performance. Where's your revenue coming from? Did you have a good week, month, or quarter? Who are your biggest clients, where are your biggest risks, strengths, weaknesses, and opportunities? Good bookkeeping helps you monitor the pulse of your business -- not just at tax time.

3. Not forming an LLC (or other business entity)

If you're serious about being a small business owner, and not just a hobbyist or side hustler, you should form a Limited Liability Company (LLC) or other legal business entity for your business. Make your business "official" and real in the eyes of the law by forming an LLC.

Setting up an LLC also helps you get an employer ID number (EIN) tax ID for tax purposes. It lets you open a business bank account and start to build business credit under the name of your company. Forming an LLC can also give you some other useful tax benefits -- because it gives you flexibility for how to handle your business income for tax purposes.

4. Not filing taxes as an S Corporation

If you have an LLC, and you have enough business income to be worth using this strategy, you should consider filing taxes as an S Corporation. This is a tax strategy that small business owners can use to get more advantageous tax treatment for their business income.

Instead of paying self-employment taxes on your full amount of business income like a sole proprietor or LLC would do, forming an LLC and then electing to file taxes as an S Corporation lets you pay yourself a salary, and then pay yourself a "distribution" of other business income -- but you don't have to pay self-employment taxes on that distribution amount. Like an LLC, an S Corp is a pass-through entity -- so the income also gets the federal 20% qualifying business income deduction .

Talk to an accountant for advice. Filing taxes as an S Corp might not be the right choice for every business owner or type of business.

5. Not hiring professional tax help

Speaking of accountants: you do have professional tax help, right? You're not trying to run a business and file your own taxes , are you?

Small business taxes are generally way too complicated to navigate yourself. Spend the money and get some help. It's a huge weight off your shoulders. Even if you love bookkeeping and taxes, it's beneficial to get professional tax help so you have an extra set of eyes on your tax return -- and someone you can go to for personalized advice.

6. Not getting a health savings account

If you have a high-deductible health plan (HDHP) that is eligible for a health savings account (HSA), you really should use it. Health savings accounts are versatile, powerful tax-advantaged accounts. It's like a traditional IRA, but for healthcare. For 2024, you can deduct up to $4,150 of HSA contributions (if you have single coverage) or $8,300 for family coverage. Don't make the mistake of missing out on this extra tax break -- and there are no income limits.

7. Not using a small business retirement plan

Small business owners also get an extra tax break from the IRS when saving for retirement. There are several types of tax-advantaged small business retirement plans that your company can use, depending on whether you have employees and other aspects of your business finances. Some of these plans, like a SEP IRA, can let you save more money for retirement than you could save as an employee with a 401(k).

Bottom line

Small business owners work too hard to lose money to tax mistakes. Use tax software , bookkeeping software, professional tax help, tax-advantaged accounts, and other tools to help you maximize your tax savings and build a stronger foundation for your business.

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Money blog: MasterChef judge Monica Galetti closing restaurant

The restaurant run by MasterChef judge Monica Galetti and her husband David is closing its doors after seven years of business. Read this and the rest of today's consumer and personal finance news in the Money blog, and leave a comment or home gym hack in the form below.

Wednesday 10 April 2024 07:31, UK

• Great British Menu legend shares ultimate toastie recipe in Cheap Eats
• Masterchef judge to close restaurant
• Santander offering free railcard to new young customers
• Basically...  Tax codes
• Popular pub chain owner admits 'uncertainty' over future
• Listen to the Ian King Business Podcast above and tap here to follow wherever you get your podcasts

Ask a question or make a comment

Sky News is looking to speak with residents of shared ownership properties who have been impacted by rising service charges. 

Please reach out if you have been affected and are willing to tell us about your experience.  

Send us a message on WhatsApp or email [email protected] .

By Ollie Cooper, Money team

Gym memberships can be steep. 

Industry giant PureGym told Sky News the average cost of its London gyms was around £32.32 per month. Outside of London it's around £23.30. 

If you're training in the capital, five years of membership will set you back nearly £2,000. 

So, in the long run, could you do it for less at home?

We enlisted Lee Mitchell, head personal trainer at Jogger.co.uk, to see if he could create a home gym for under £1,939.20 - the price of five years' membership at a London PureGym. 

We set him some criteria: we'd need a good range of equipment, including benches, dumbbells, cable machines and cardio machines - and at least some of it had to be brand new.

"A home gym setup can represent serious value over time, considering everything from commuting costs to the convenience of having your workout space readily available in the comfort of your own home," said Lee. 

But could he deliver on the challenge set?

What he bought

At the top of Lee's shopping list was a multi-purpose power rack that could double as a squat rack and smith machine.

"This equipment, although a larger investment, covers fundamental exercises for individuals at all fitness levels, making it integral to any home gym," he said. 

After a quick search, he found exactly what he was looking for in good condition on Facebook Marketplace. 

This cost him £250 - a good start, as this usually retails for around £2,000.

Next, Lee found a cable machine (£359.10 with new customer discount at Gym Master), a Spin bike (£219 at Fitness Superstore), a weight bench (£41.99 at Amazon) and a vertical leg press (£429 at Fitness Superstore) all brand new and well within budget.

"Certain items genuinely benefit from being sourced brand new, such as the cable machine (to prevent fraying cables for safety) and the vertical leg press (to ensure it's in proper working order, especially given the potential risks of a faulty machine)," Lee said. 

So far, we've got five items for £1,200.09. 

Lee picked up half of his total equipment brand new, but it was back to Facebook Marketplace for the rest. 

Having adjustable dumbbells maximises space (crucial for a home gym), and Lee was able to find a great set of two for just £200. They allow you to move from as little as 5kg all the way to 40kg. 

The current owner claimed to have spent around £300 when they bought them and insisted their condition was "like new".  

Next came an Olympic barbell and 100kg worth of weighted plates to go with it. 

Lee found exactly what he was looking for at a cost of £240. 

We're just a lifting platform away from completion now - which swiftly came in at £200. 

"In total, I spent just over an hour finalising my list of equipment, sourcing from various places including Facebook Marketplace, Amazon, Fitness Superstore and Gym Master," Lee said. 

He opted for a 50/50 split between brand-new items and second-hand products, "partially to prove that this is not all about bargain hunting pre-loved items".

What about space?

The obvious argument here is that it would take a significant amount of space to put all this (in some cases) shiny equipment. 

But Lee made his choices with that in mind. 

"I factored in that the average UK garage is typically 3x6m, a common size for gym conversions. 

"All the equipment I chose fit perfectly into a 3x3m space, allowing for ample "spreading out" room within a larger space," he added. 

Impressively, Lee managed to source eight key pieces of equipment for £1939.09 - which leaves us 11p to spare.

Use the form above to tell us your home gym hacks. 

Santander is offering a free four-year railcard to new current account holders aged between 20 and 25.

Santander Railcard holders get a third off standard fares in England, Scotland and Wales, plus money off London Underground.

It also comes with deals on holidays, restaurants and attractions. 

Customers need to act quickly if they want one - it's only available until 30 April. 

Here's what you need to know:

It is only available to new customers aged between 20 and 25 who open either an Everyday, Santander Edge or Santander Edge Up current account. 

In order to get the offer, you need to have paid in at least £500 to your Santander account by 14 May 2024. 

If you meet the eligibility requirements, the bank will send you a code to claim your railcard by the 31 July 2024. 

You'll also get an email to tell you it's arrived, and you'll find your code in the statements and documents section of your mobile app. 

Then just follow the instructions that come with it to claim your card. 

The bank has warned the number of railcards available is limited, so the offer could be withdrawn.

Every Wednesday we get Michelin chefs, top bloggers or critics to pick their favourite cheap eats around where they live and at home. 

This week, we're delighted to have Great British Menu queen Lisa Goodwin-Allen, executive chef of the Michelin-starred Northcote restaurant in Lancashire.

Hi Lisa, can you tell us your favourite places in Lancashire where you can get a meal for two for less than £40?

I love Jungle on the high street in Clitheroe. I go there a lot for brunch with my husband and my son. It's great value for money and just has a really cool, relaxed atmosphere, and they serve really tasty food. 

They have things like sweetcorn fritters with chilli jam and shakshuka with a falafel scotch egg on the menu.

The dishes always have a twist to them. It also feels great to be able to give back to the brilliant independents on the local high street.

What's your go-to cheap eat for a night at home?

A cheese toastie with tomato relish...

Tomato relish ingredients:

• 25g onion, finely sliced
• 1 garlic clove, grated
• 250g good quality, soft, ripe plum tomatoes, chopped
• 20g olive oil
• 10g tomato puree
• 50g tomato juice
• 1/4 tsp red chilli, finely diced
• 1 tsp lime juice
• Good pinch of salt and sugar
• In a medium sized pan, heat the olive oil and add the finely sliced onion
• Season with salt and cover the pan with cling film or a lid
• Cook the onion down until it is completely soft but with no colour
• Once soft, remove the lid and continue to cook on a medium heat until the onion is nicely caramelised
• Add chopped tomatoes, tomato puree, tomato juice, garlic and chili.

Ingredients for the cheese toastie:

• 125g semi-skimmed milk
• 15g egg yolk
• 12g cornflour
• 50g cheddar (grated)
• 5g Tunworth cheese (cut into to chunks)
• 4 slices of toastie bread
• 50g cheddar to garnish 
• In a small bowl whisk together the egg yolk and cornflour
• Pour the milk into a medium pan, bring to the boil, and once boiling pour on to the egg mix, mix well then pour back into the pan
• Cook on a medium heat, stirring continuously until the mixture thickens
• Once thickened whisk in the grated cheese and Tunworth
• Spoon the mix in semi spear molds (3cm) and freeze. If you don't have spear moulds, you can use an ice cube tray and fill half way up
• Take one slice of bread and brush with melted butter on one side, place the buttered side of bread on to the toastie maker, place two domes of frozen cheese on to the bread in each triangle then place a slice of bread on top, brush with more melted butter, close the lid
• Cook for 3-4 minutes until golden brown.
• Remove then put a good spoon of tomato compote on top, cover with more grated black cow cheddar and finish with a drizzle of olive oil and a touch of salt.

Read all our Cheap Eats recommendations around the UK here ...

The restaurant run by MasterChef judge Monica Galetti and her husband David is closing its doors after seven years of business. 

Mere in Fitzrovia, London, will hold its last service on 16 April, according to a statement on its website. 

"It is with heavy hearts that we announce the closure of Mere restaurant- but we feel this is the right time after seven years," it read. 

"We want to take this opportunity to wholeheartedly thank Alastair Storey (owner of catering company WSH, which backed the restaurant) and everyone who has supported us and our loyal patrons and dedicated staff throughout this journey.

"To our customers we thank you for your loyal and joyous visits. We hope to raise one last glass together before we close." 

While it did not hold a Michelin star, the eatery had been recommended in this year's Michelin Guide for its South Pacific Island inspired dishes. 

The owners haven't given a reason for the closure, but it comes as the hospitality sector continues to struggle with rising running costs. 

A survey by UKHospitality, the British Beer and Pub Association, British Institute of Innkeeping and Hospitality Ulster recently found that a quarter of operators had no cash reserves left after years of economic challenges.

High mortgage costs have led a large chunk of UK homeowners to rent out their rooms in a bid to raise more cash.

More than one in 10 (12%) of people who own property in London have moved someone into their home to create additional income, according to a new report from Barclays.

The figure reveals the impact of the capital's soaring housing costs - across the UK as a whole, the proportion of people renting out rooms stands at 3%.

The Barclays report also reveals that 16% of people aren't confident they'll be able to meet their mortgage or rental payments.

Cost of living pressures and higher interest rates have taken a toll on borrowers in the past couple of years.

Last month we reported how there had been a jump in the number of properties falling behind with mortgage payments.

The owner of Slug & Lettuce and Yates's bars has revealed concern over its future as it looks to refinance more than £2bn in debts due next year, The Telegraph reports .

Stonegate - the UK's biggest pub operator with 4,500 venues - said in its interim report that a "material uncertainty exists" over whether it can continue as a going concern (a term meaning a business has financial stability).

If the company is unable to refinance its debts, it said it "may be unable to realise its assets and discharge its liabilities in the normal course of business".

Stonegate is owned by the private equity firm TDR Capital, which jointly owns Asda.

It also runs the Be At One and Popworld chains and the Craft Union pub brand.

At the end of the financial year, its debts were more than £3bn.

Some of this is linked to its buyout of rival pub chain Ei Group in 2019.

David McDowall, chief executive of Stonegate, struck a more upbeat note in comments to the Money blog, saying: "I am really pleased with the performance of the business in 2023, which included a sector-leading Christmas trading period. 

"We have delivered a rise in revenue and a significant increase in profitability. Our all-round performance exemplifies the strength and depth of the Stonegate estate, with our outstanding Craft Union and L&T divisions continuing to lead the way. This is testament to the hard work of our people and partners, but also to the success of our ongoing initiatives to increase profitability across our portfolio of brands and venue formats. 

"Our performance gives me real confidence in the future and excitement in seeing our strategy come to fruition. Notably our asset optimisation plan which makes sure we have the right pub in the right location, further profit improvement initiatives, and above all our efforts to continue to support the Great British pub. 

"With a summer of sport on the horizon, and the Euro's and T20 World Cup fast approaching, we are looking forward to building on this momentum in the months ahead. We have been very clear that we continue to work towards achieving our long-term balance sheet goals, with the successful refinancing of a portion of our estate in December marking a significant strategic step towards this."

A record number of council bosses are earning salaries of at least £150,000 , according to new data from a pressure group.

The Taxpayers' Alliance annual Town Hall Rich List says at least 3,106 people employed in local authorities in 2022-23 received at least £100,000 - an increase of 347 on the previous year.

Of them, at least 829 received more than £150,000, the highest number since the list began in 2007.

John O'Connell, chief executive of the TPA, said residents "can use these figures to ask whether precious funds are really going towards frontline services, or whether town hall bosses can get better value for money".

M&S is investing £1m to change the diet of its milk-producing herd of cows and reduce the amount of methane they create.

The supermarket chain said it would work with 40 M&S dairy farmers to remove a projected 11,000 tonnes of greenhouse gas emissions from the atmosphere annually.

The move will cut the carbon footprint of M&S's fresh milk products by 8.4%, the company said.

Britons are being urged to "stop and think" before dipping into their retirement pot early during "peak" withdrawals season over the next few months.

Investment platform AJ Bell said people typically access their funds at the start of the tax year when allowances are refreshed.

Its director of public policy, Tom Selby, said this can be a "perfectly sensible thing to do" if there is a "thought-through withdrawal plan" in place.

However, he warned Britons not to make a "rash decision".

"Taking money out of your retirement pot early or withdrawing too much, too soon could have disastrous consequences over the long term," he said.

AJ Bell has listed five reasons why people should "stop and think" before accessing their retirement pot early:

• Early access increases the risk of running out of money in retirement and being left to rely solely on the state pension. For example, a healthy 55-year-old with a £100,000 pension pot who withdraws £5,000 a year could run out of funds by age 80 if their withdrawals increase with inflation;
• Accessing retirement cash early could also see savers miss out on investment growth;
• It will trigger the money purchase annual allowance (MPAA), which significantly reduces the amount you can save tax-free from £60,000 to £10,000;
• Hiking withdrawals could impact sustainability. Persistent high inflation could impact those with a laid-out withdrawal plan and risk them running out of funds early;
• Savers can pass on leftover pensions tax free if they die before the age of 75. AJ Bell says for those who wants to leave assets to loved ones, it makes sense to leave as much of your pension untouched as possible in order to minimise your tax bill.

Basically, a tax code is a series of numbers and letters used by employers or pension providers to work out how much tax should be deducted from your pay or pension at source.

Anyone in employment or with a private pension will have one.

Making sense of the letters and numbers

The number shows the amount you can earn tax-free - although you need to add a zero to get the actual figure. 

For example - the number 1257 means you can earn £12,570 a year tax-free.

The letters (which follow your tax code number) relate to your situation and how it alters your personal allowance.

For example,  L  means you are entitled to the tax-free personal allowance we outlined above. Therefore a tax code of 1257L (the most common tax code) means you are entitled to a personal allowance of £12,570 before any income tax is paid.

Here are what the other letters mean: 

• T  is similar to  L  in that if it follows numbers, you are entitled to that tax-free personal allowance. However, it also means HMRC will be taking a closer look at your tax affairs - usually the case if they are complicated;
• BR  means you aren't entitled to any personal allowance (usually because it's a second job etc) and will pay a flat rate of 20% tax. This is the same for  D0   but the rate is 40%, and  D1  where the rate is 45%.  SD2  is similar but only applicable in Scotland, where the top rate is 46%;
• K  means your personal allowance has been eroded down to less than nothing, meaning the number after the K is actually a negative personal allowance;
• 0T  means no personal allowance but you'll fall under the tax bands;
• NT  simply means "no tax";
• M  means your spouse or civil partner has transferred some of their personal allowance to you;
• N  means you've transferred it to your spouse/civil partner;
• If you have an  S  or a  C  ahead of any of the other letters, that just means you're living in Scotland or Wales. 

What happens when they're wrong?

Millions of Britons could be paying too much tax due to tax code issues, new data from Canada Life shows. 

A survey by the financial services provider found that 31% of adults have been on the wrong tax code at some point - with the average overpayment worth £689.

Over two thirds of those surveyed didn't know how to claim back overpaid tax.

The survey also found one in six UK adults did not know if they were on the right tax code and 39% were not aware what any of the letters or numbers on their tax code mean.

However, an HMRC spokesperson said: "We don't recognise these figures. 

"Tax codes are based on information provided by employers or pension providers. 

"People can check their code quickly and easily online and update any details that may be affecting it."

Why would my tax code be wrong?

There are any number of reasons HMRC could have the wrong tax code for you, including:

• A change in job 
• Having more than one source of income
• Retirement or having more than one pension
• Receiving employee benefits
• Starting your first job

How do I check my tax code?

You can check your tax code on your personal tax account online, or by looking at any payslip or via the HMRC app.

If you think it's wrong, you need to contact HMRC to tell them.

You can either phone 0300 200 3300, use their chat function or send them a letter. 

Emergency codes

W1 ,  M1  or  X are usually found after a regular tax code (eg 12570L W1).

This usually only happens if there's a delay in HMRC receiving details about a change in your circumstances, for example if you've just started a new job. 

SportsDirect.com, owned by Mike Ashley, is bringing a claim today against Newcastle United - the club Mr Ashley used to own.

It concerns a deal Newcastle has with JD Sports to offer exclusive kit sale rights.

The Competition and Appeals Tribunal will hear the case today - though it's not clear when a decision will come. 

Reports suggest Mr Ashley is seeking £1.5m in damages.

His company claims the club is abusing its dominant market position by refusing to supply its replica kit for the 2024-25 season.

Businesses are allowed to strike exclusivity deals unless they are in a dominant market position - for example, companies like Amazon or Google clearly have that status.

This case could rest on whether the tribunal deems Newcastle to hold such a position in the market.

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