Sole proprietors, partnerships, limited liability companies, Sub S Corporations, and C Corporations that do not employ any common-law employees have several options for business retirement plans. The business owner's spouse (if employed and compensated by the business) may also participate in these plans.
Individual 401k
For businesses with no common-law employees, these business retirement plans allow owners to maximize their contributions. Employer contributions are tax deductible (subject to applicable limits) to the business, and salary deferrals can be made on a pre-tax basis (which are excluded from income for federal income tax purposes) or as Designated Roth Contributions.
SEP IRA
Simplified employee pension (SEP) plans allow business owners to set aside money in a retirement account for themselves (and spouse, if applicable) subject to applicable limits. There are no administration costs, paperwork is minimal, and all contributions are tax deductible to the business.
SIMPLE IRA
Since an owner-only business is less than 100 employees, a business owner can establish a SIMPLE IRA (including a spouse). A business owner (and spouse) is able to defer a portion of his/her salary as pre-tax contributions and the business makes a tax-deductible matching or non-elective contribution. There are no administration costs and minimal paperwork.
Service is available online and through a toll-free phone number, so you can focus on running your business.
SEP IRA
Simplified employee pension (SEP) plans allow the business to make all contributions for every eligible employee. There are no administration costs, paperwork is minimal, and all contributions are tax deductible to the business (subject to applicable limits).
SIMPLE IRA
Any business with 100 or fewer employees can establish a SIMPLE IRA. There are no administration costs and it offers benefits similar to a 401k plan. Employees are able to defer a portion of their salary, pre-tax, and the business makes a tax-deductible matching or non-elective contribution.
Safe Harbor 401k plan
Most for-profit and some non-profit businesses can establish a 401k. The Safe Harbor 401k Plan requires the business to contribute either matching or non-elective contributions to the plan on behalf of eligible employees. Safe Harbor plans do not restrict the amount of money highly compensated employees can contribute to the plan. Eligible employees can contribute a portion of their salaries, either pre-tax or as a Designated Roth Contribution. Profit-sharing contributions are optional and employer contributions are tax deductible.
Traditional 401k plan
The traditional 401k plan allows eligible employees to contribute a portion of their salaries, either pre-tax or as a designated Roth contribution. The business may choose to contribute matching, non-elective, or profit-sharing contributions to the plan on behalf of eligible employees. Employer contributions are tax deductible, and employee contributions may be excluded from income for federal income tax purposes.
| Individual 401k | SEP IRA | SIMPLE IRA | Safe Harbor 401k | Traditional 401k | Profit Sharing Plan | |
|---|---|---|---|---|---|---|
| Business type | Businesses with no common-law employees and wanting to maximize contributions. | Any business willing to make all plan contributions and desires simplified plan administration. | Any business with 100 or less employees seeking a mix of employee and employer contributions. | A business that's able to make a required contribution and wants to allow all employees the opportunity to maximize salary deferrals. | A business that doesn't want required employer contributions and owners are not concerned with maximizing their contributions. | Any business willing to make all plan contributions and seeking simplified administration (e.g. no employee contributions). |
| Key benefits | Offers Designated Roth Contributions or pre-tax contributions and loan privileges. | Operate with no annual costs or IRS filing requirements. | Operate with no annual costs or IRS filing requirements. Similar features to a 401k plan. |
Allows larger employee contributions due to required employer contributions. Designated Roth Contributions, automatic enrollment, and automatic increase features available. |
Designated Roth Contributions, automatic enrollment, and automatic increase features available. | Various allocation formulas available for employer contributions. Employer contributions can be subject to vesting schedule. Plan investments are typically directed by employer. |
| Maximum total contributions per participant for tax years 2024 | Employee elective deferral of $23,000 or $30,500 if age 50 or older. Overall limit of 100% employee's compensation or $69,000 ($76,500 if age 50 or older with catch-up contributions). | Lesser of $69,000 or 25% of employee's compensation. | Employee elective deferral limit is $16,000 or $19,500 if age 50 or older. Employer must make a matching contribution up to 3% of compensation, or a non-elective of 2% of each eligible employee's compensation. | Employee elective deferral of $23,000 or $30,500 if age 50 or older. Overall limit of 100% employee's compensation or $69,000 (or $76,500 if age 50 or older with catch-up contributions). | Employee elective deferral of $23,000 or $30,500 if age 50 or older. Overall limit of 100% employee's compensation or $69,000 (or $76,500 if age 50 or older with catch-up contributions). | $69,000 |
| Can there be a vesting schedule? | No | No | No | Yes, on "non-safe harbor" employer contributions. | Yes, on any employer contributions. | Yes |
| Are loans an option? | Yes | No | No | Yes | Yes | Yes |
| Additional plan information | IRS Form 5500 may be required. Annual administration fee required. |
No administrative costs or IRS annual filing requirements. No employee contributions. |
No administrative costs or IRS annual filing requirements. Annual administration fee required. |
IRS Form 5500 required. Annual administration fee required. |
IRS Form 5500 required. Annual administration fee required. |
IRS Form 5500 Required. |
| Investment options | BlackRock and American Funds | BlackRock funds or State Farm Annuities | BlackRock funds | BlackRock and American Funds | BlackRock and American Funds | BlackRock and American Funds |
| More info | Individual 401k | SEP IRA | SIMPLE IRA | Safe Harbor 401k | Traditional 401k |
A 10% tax penalty may apply for withdrawals from tax-qualified products before age 59½.
Securities are not FDIC insured, are not bank guaranteed and are subject to investment risk, including possible loss of principal.
Securities distributed by State Farm® VP Management Corp.
BlackRock mutual funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). BlackRock is not affiliated with SFVPMC or any other entity mentioned herein. BlackRock is a registered trademark of BlackRock, Inc.
SFVPMC is a separate entity from Capital Research and Management Company (CRMC) which is the investment adviser for the American Funds. American Funds securities are distributed through American Funds Distributors, Inc. All Capital Group trademarks referenced are registered trademarks owned by The Capital Group Companies, Inc. or an affiliated company.
Neither State Farm® nor its agents provide tax or legal advice.
AP2024/03/0349