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Couples in Business

How to Save for Retirement When Owning a Business With Your Spouse

You’re in love, you’re in love!  And you don’t care who knows it!  

So much so that you’ve braved the hurdle of starting a business with your darling.  Once your business becomes sustainable, and dare I say it… profitable, you will want to start thinking strategically about how to save, defer taxes, and plan for the future.  In this blog, we will review retirement plan options for couple owned businesses just like ourselves.

WHAT ARE SOME OF OUR OPTIONS?

Traditional IRA and Roth IRA:

Ideal User:

Couples who would like to make a smaller retirement contribution with very little effort to establish this.

Advantages: 

  • You likely already have an IRA established and don’t have to worry about opening up a new account.
  • You have access to these funds for first-time home buyer expenses (NOTE: for a Roth IRA, you’ll need this to be opened for at least 5 years first), qualified education expenses, and hardship withdrawals without incurring a penalty.

Disadvantages:

  • Traditional/Roth IRAs have the smallest contribution amount limits.  
  • In an article I wrote discussing allocating our income, we advise our clients to save 20% of their income.  Therefore, if your individual or collective income is greater than $30,000 or $60,000 respectively, you will be advised to find another savings vehicle for future you. 
  • You cannot make ‘employer’ contributions into this plan for yourself, your spouse, and your employees.  If you are looking for a retirement plan as a benefit to employees, keep reading.

Contributions:  

The maximum you can contribute to an IRA (Traditional or Roth) in total is $6,000 in 2020 (or your total compensation for the year, whichever is less).  That is not $6,000 to each type of IRA, that’s a total of $6,000/yr between the two IRAs types (Traditional and Roth).  If you are 50+, slap on another $1,000 to that contribution.  This is known as the “catch-up contribution.”

Anyone with earned income can contribute to a Traditional IRA.  However, there are limitations to whether or not that contribution is deductible.  If the two of you are not covered by an employer provided retirement plan, (because you own a kick-a$$ business together!) then there are no limitations to whether or not the contribution is deductible.  If you own a business together and YOU are covered by an employer retirement plan, click here to know your deduction limits.  If you own a business together and YOUR SPOUSE is covered by an employer retirement plan, click here to know your deduction limits.

NOTE: This will help you determine if you are covered by an Employer Retirement Plan.

In order to contribute to a Roth IRA, your modified adjusted gross income needs to be less than $206,000 (phase-out begins at $196,000) if you file jointly.

Administrative Notes:  

Again, the ease of establishing this account is key here.  There are no funding requirements and no employer tax filing requirements.  You can establish an IRA and/or make a contribution into the IRA until the tax filing deadline for the year prior.  For example:  Dan and I want to make a retirement plan contribution today (January 2020).  We have until Wednesday, April 15, 2020 to open an IRA and make a 2019 contribution.  

SEP IRA:

Ideal User:  

A couple owned business looking to contribute more than $6,000/yr per individual to their own retirement accounts and/or looking to make employer contributions to employees.  This plan is also easy to establish and has very little administration tasks.

Advantages:  

  • It allows couple owned businesses to contribute a much larger amount to their retirement on an annual basis(discussed below).  
  • They have low administration costs and provide flexibility to the employer (or co-owners) on how much to contribute each year.

Disadvantages:

  • It provides immediate vesting to your employees.  Having vesting schedules helps prevent turnover within a firm and incentive for employees to stay.  
  • You must contribute the same percentage amount to each eligible employee, including yourself.  
  • You are unable to take a loan from the SEP IRA, unlike the 401(k).  

Contributions:

Contributions made by the employer to an employee SEP IRA cannot exceed the lesser of 25% of the employee's compensation, or $57,000 for 2020 ($56,000 for 2019).  An employee cannot make elective salary deferrals into a SEP IRA like you can with a 401(k) or 403(b).  For self employed business (or a couple owned business), contributions are limited to 25% of your net earnings from self-employment (not including contributions for yourself), up to $57,000 (for 2020; $56,000 for 2019).

NOTE: If you own an LLC together and would like to determine how much each spouse can contribute to a SEP IRA (assuming you are both owners, rather than one being an owner and the other an employee), you will utilize your Schedule K-1 (Form 1065) to determine each of your partnerships portion of the income.  The reported income from each K1 is then used to calculate the amount each of you can contribute to your SEP IRA.

Administrative Notes:

Unlike the Traditional IRA/Roth IRA, you are able to make SEP IRA contributions for the previous year past the April 15th deadline if you file an extension on your taxes.  There are a few more steps to establish a SEP IRA compared to a Traditional/Roth IRA such as creating a written agreement to provide benefits to all eligible employees, giving employees certain information about the agreement, and establishing an IRA account for each employee.  There are additional reporting requirements, however, it’s highly likely the custodian you work with will provide some hand holding here.  

SIMPLE IRA:

Ideal User: 

A couple owned business with 100 or fewer employees looking to establish a retirement plan with little administrative set up and allows both employee and employer contributions.

Advantages:

  • The SIMPLE IRA allows for both employee and employer contributions.  
  • Similar to the SEP IRA, there are no IRS filing requirements with a SIMPLE IRA.  

Disadvantages:

  • There are annual funding requirements (discussed below).  
  • Lower contribution limits (discussed below).

Contributions:

As mentioned above, the maximum contribution in 2020 is $13,500 (plus $3,000 for those 50+).  The employer must always match one of two ways: 1) Matching 3% of the employee’s compensation or 2) Match 2% non-elective contributions for each eligible employee.  In other words, even if an employee doesn’t contribute, you would still have to put 2% of their compensation in a SIMPLE IRA for them. 

NOTE: if you contribute to any other Employer Provided Retirement Plan (401(k), 403(b), profit sharing plan, or money purchase plan) then your SIMPLE IRA contribution count towards the overall $57,000 annual maximum.  However, SIMPLE IRA contributions do not count towards your annual IRA contributions ($6,000 in 2020).

Administrative Notes:

Employer contributions must be made by the employer's tax return filing deadline, including extensions, for the employer to deduct contributions for that tax year. The employer must also make employee elective-deferral contributions within 30 calendar days after the last day of the month that they were withheld.  If your company grows past the 100 employee mark, you generally have a 2 year grace period to transfer the plan into something else.

Solo 401(k):

Ideal User: 

A couple owned business with no employees looking to contribute above and beyond the Traditional/Roth IRA contribution limits.

Advantages:

  • May establish a Solo ROTH 401(k), whereas the SEP IRA does not have that option
  • You are permitted to take loans against this account (Traditional/Roth IRAs, SIMPLE IRAs, and SEP IRAs do not permit this)
  • You make contributions both as the employer and employee which may allow you to  contribute more than you would be able to with a SEP IRA
  • There are catch-up contributions you can make to a Solo 401(k) if you are 50+, unlike the SEP IRA

Disadvantages:

  • A solo 401(k) can only be established if you two are the only employees of the business
  • This has more paper to establish, including filing Form 5500-EZ with the IRS.
  • They may have higher administrative costs compared to the options above.

Contributions: 

The contribution limits for a Solo 401(k) are in total $57,000 (for each of you).  $19,500 is the maximum you can contribute as an employee (again, for each of you).  Your contributions cannot exceed your salary or earned income.  Earned income equals your net earning minus half of your self-employment taxes and 401(k) contributions.  Your employer contributions can be up to 25% of compensation or 20% of earned income.  

Administrative Notes: 

The SECURE Act enables Solo 401(k)s to now be established by the tax filing deadline of the business, including extensions.  However, this retroactive deduction only applies for employer contributions, not employee contributions.  From a set up perspective, you will need to establish an adoption agreement and a basic plan document.  Again, any custodian would gladly help you with this process.

SAVER’S TAX CREDIT

Starting a business doesn’t mean you’ll be profitable right away.  In fact, it’s usually the opposite (you’ll be spending more than you’re making).  But, if you can prioritize your future with a portion of your self-made dollars, the government literally gives you money in the form of a tax credit if your AGI (adjusted gross income) is less than $65,000 and filing as married joint.  It’s like the good ol’ days when we used to have an employer match, but this time the government is matching our contribution!  To learn more about this credit, click here.

SO WHICH PLAN IS BEST FOR US?

It’s going to depend on a variety of factors such as if you have employees, what is your ultimate goal, and how much are you looking to contribute.  Our hope is that this writing encourages you to start thinking about establishing something or consider a different option than what you have in place currently.  As a couple owned business, it’s entirely up to you two on whether or not you prioritize your future together. 


Do you and your partner need an unbiased look at your business and personal finances?  
Learn more about
our services and schedule a FREE consultation with us [another couple in business] Natalie, CFP® and Dan, CFP®.


- Natalie

Disclaimer:  This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

Natalie Slagle
Founder, Fyooz Financial
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