At The Money: How to Max Out Your Small Business Retirement Plan

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2:50in overtime. Saving for retirement is challenging, especially if you're a small business owner or solo practitioner. Various retirement plans like SEP, solo Ks, mega backdoor Roths can really be confusing. There are so many choices, the options have increased, and the rules have become even more complex. To help us unpack all of this and what it means for your retirement portfolio, let's bring in Dan LaRosa. He is an expert in corporate qualified retirement accounts, working with clients all over the country. Full disclosure, Dan runs the Corporate Retirement Planning Group at the Ritholtz Wealth Management, my firm, and he's one of my partners.

3:37So Dan, let's start basic. What options exist for either solo or small business owners if they want to save more money for retirement on a tax-deferred basis? Sure, the main options, or at least the options that you'll more likely than not start with, are a SEP IRA or a solo 401k. A lot of people default to a SEP, even if you're in a situation where the solo K might actually be a better option. The SEP is just simpler, and it's often the first thing that your CPA is going I mentioned to you or recommend. Solo 401k with a mega backdoor Roth feature has also gotten more popular in recent years. And once you have one of those in place, if you're still looking for more tax deferral opportunities, a defined benefit cash balance plan might be a good fit.

4:28Really, really interesting. Now, last time when we talked about mega backdoor Roth, the total you can contribute if you're working for a firm is$72 ,000. But these days, so many people have side hustles. They set up an LLC or a little company to do something, and maybe they're a solo practitioner. Maybe it's a husband and wife, and this is income beyond what their regular paycheck is. If you maxed out your mega backdoor Roth at your regular employer and you have this side gig, how much can you add above that$72 ,000? Yeah, a lot of people don't realize this, but each plan has its own$72 ,000 limit, right?

5:15The only thing that aggregates across all plans is the$24 ,500 employee deferral limit, right? That's the amount of money that each of us can contribute to our 401k plan. But each plan has a$72 ,000 limit. So what you can do if you have a side hustle or a solo gig, you can set up a solo 401k with a mega backdoor Roth, or even just a regular solo K or a SEP. As long as your income is high enough, you can make additional contributions into that retirement plan of up to$72 ,000. And how do they figure out the 72 ,000? Is that based on over 145 or 150 ,000 a year, or is there a percentage calculation?

5:59Where does that 72 ,000 number come from? Yeah, well, the 72 ,000 number is just the overall 401k limit, right? Or retirement plan limit. The SEP actually has the same limit. But how to get there is a bit of a loaded question. And it's different for each of those plans. So the SEP, the SEP IRA is technically all employer contributions. So your contribution amounts are directly tied to your earnings. All right. So you can contribute up to 20 % of your net income to get to that$72 ,000 number. All right. So you do the math. You need an income of$360 ,000 to max out and get to that$72 ,000. All right.

6:43The solo K, only a portion of your contribution is tied to your income. so you can contribute a lot more on a lower income. All right. An income of about$235 ,000,$240 ,000 will get you to that$72 ,000 max. The MAGA backdoor Roth, it's a bit of a cheat code. As long as your net income is$72 ,000, you can contribute all of that into the solo 401k. What are the trade-offs between the SEP IRA, the solo 401k, the solo mega backdoor Roth? It sounds like this is really complex. Are there any advantages or disadvantages to each of these? Yeah, it is complex. And that's why a lot of people just kind of default to a SEP because it's easier.

7:34But it really depends on your income and your objectives. If your income is on the lower side or maybe it varies from year to year, the solo K is going to certainly allow the most flexibility and let you maximize your contribution even in those lower income years. If Roth contributions are the objective, you just can't beat the solo K with the mega backdoor Roth. It's going to, again, allow you to contribute up to$72 ,000 in Roth contributions. You can't find that anywhere else. But if your income is consistently high and Roth is not a priority, you just want to maximize your tax deferrals, then a SEP is going to get the job done.

8:15So if you're making$100 ,000 or less or$250 ,000 or more or a million or more, that may affect which of these you choose. Yeah, for sure. And again, assuming let's work with the assumption that you want to maximize your contributions, you want to contribute as much as you can. The lower your income is, the more powerful the solo 401k is, right? You're just going to have a lot more flexibility with your contributions. And the higher your income goes, you're fine with a SEP because that 20 % of your net income, if your income is high enough, again, over 350, 360, you're going to be putting 70 ,000 plus away a year.

8:54Really intriguing. How do you count an employee if you're solo 401k? It doesn't matter if you're 1099 or W-2 or part-time or spouse, a husband and wife own a small business. Who counts as an employee for these? The solo 401k is easy. Once you have a W-2 employee that becomes eligible, it's no longer a solo K and it's going to be hard for the owner to max out without contributions to that employee. The SEP is a little bit different. Eligibility requirement is referred to of the three of five rules. So once you have an employee that's worked three out of any five years earning more than something nominal, I think$700 or$750, they're eligible.

9:38And that means they would receive the same percentage of compensation that you're giving yourself. So that could get expensive in a hurry. As far as a spouse being classified as an employee, you can have your spouse in the solo K and still run the solo K. You're not going to be disqualified. Your spouse counts as another owner. Also, a lot of people don't realize that a solo K can have multiple partners in it. All right. So in other words, if a company has four different partners, you can have all four partners and each of the spouses in the solo K. As long as there are no non-owner employees, you're good to go.

10:24And that's$72 ,000 per person, husband and wife. Per person. Again, assuming the income allows for it, but yes. Really, really intriguing. Man, let's talk about the administration and compliance burdens of these various options. I know you need plan documents, and then there's the infamous Form 5500, and there are all sorts of record-keeping rules. What do small businesses have to know? How do they avoid getting tripped up by all of this? Yeah, SEP is the easiest for sure. It's just a few forms to set up, and there's no annual maintenance, no filings. owner just needs to track their contributions.

11:06With the solo 401k, there is a little more. And the biggest thing is once the plan reaches a total of$250 ,000 in total plan assets on December 31st of any plan year, a form 5500EZ must be filed. All right. That's basically the tax return for the plan. It's a really simple form, but the penalties are insane. It's$250 $150 a day up to$150 ,000. So for a very long time, this really wasn't regulated. But in recent years, we've actually really seen an uptick in enforcement of these penalties. So shouldn't prevent you from setting up a solo K, but it's very important to be aware of this when you set the plan up.

11:53So let's talk setup and funding. When do these plans need to be set up and funded by? You know, we're recording this in February of 2026. Is it too late to set something up and fund it for 2025? What are the options? What does the timing look like? Yeah, no, you still have plenty of time. The SEP is an IRA. So just like any other IRA, it's always been able to be established and funded for a prior year. You have until tax filing plus extension to get that plan funded. effective I believe effective last year the solo k got a lot more lenient um and kind of follows that same path as the set so you can establish a solo k and funded for the prior year with some caveats uh if the plan is set up by April 15th let's say for this year the plan is set up by April 15th of 2026 you can make employee and employer profit sharing contributions so you can get to that full$72 ,000 as long as you fund by the extended filing deadline of October 15th of this year.

13:03If you set up the plan after April 15th of this year, you can only make your employer contributions, your profit sharing contributions to it. So you're going to be a little more limited to how much you can fund. Let's talk about succession planning or exit planning or with a husband and wife, the death of a spouse. Are there any one structure superior to others? If the owner either expects to sell the business or retire, or maybe even bring in partners, which is the most flexible here? The solo K is always going to give you more flexibility than the SEP. If there's multiple partners in the solo K, they can each contribute different amounts or some not at all.

13:44In the SEP, the contributions are pro rata, so everyone has to get the same percentage of comp. So obviously not ideal if there are going to be multiple partners or people with different goals involved. On the other hand, SEPs are just structurally a lot simpler, easier to unwind if necessary. So one isn't always going to be better than the other. It really depends on the situation. So one of the advantages of 401ks is the creditor and ERISA protections. Even if you lose litigation, nobody can take your retirement money away. Do the same things apply to the SEP or solo 401ks? Is it really the same set of rules?

14:26Yeah. So what you're talking about with 401ks is that additional ERISA protection. So ERISA plans, which are your employer 401ks and defined benefit plans, have the most credit or protection of all qualified plans. It is a common misconception that solo Ks, because they are 401ks, also have this enhanced creditor protection. They do not. Because they don't cover any non-owner employees, they don't qualify for that extra ERISA protection. So, SEPs and solo Ks are on the same level in terms of creditor protection, the same as a regular IRA. If you are in a litigious profession and that protection is important, might be a good idea to roll some of those IRA or solo K balances into your employer 401k or defined benefit plan if you have one available.

15:17That is really interesting. I would imagine doctors or I remember back in the day, brokers used to get sued on a regular basis. So that seems to be worthwhile. Last question. So if you have a business owner that's married, whether or not the spouse works for them in the business, can that spouse also open either a solo 401k or SEP or mega backdoor Roth 401k and legitimately increase the household contribution, assuming the revenue allows for it? yeah as long as your spouse is a legitimate employee of your solo practice you can do that and it has tremendous benefits but they have to be an employee on payroll receiving wages right um so okay allows you to contribute a lot even on a low income right so a spouse would be able to actually contribute a hundred percent of their compensation up to that 24 and a half thousand or if you're over 50, 32 and a half, right?

16:27So that adds up quickly. It's an easy way to kind of supercharge your household savings is adding your spouse to your solo practice retirement plan. Really, all this stuff is so intriguing and it's just another tool in the toolbox. To wrap up, if you're a small business owner or solo practitioner and you haven't taken advantage of the various tax-deferred retirement savings plan, whether it's a SEP, a solo 401k, a mega backdoor Roth 401k, speak to your fill in the blank, financial advisor, accountant, tax professional, and get hopping on this. This is an enormous way to accumulate wealth over the next 10 or 20 years and have various options of whether this goes in pre-tax or post-tax that allows you to maximize your long-term returns.

17:27I'm Barry Ritholtz. You're listening to Bloomberg's At The Money. And I've been taking care of business every day. Taking care of business every way. I've been taking care of business. It's all mine. Taking care of business and working overtime. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value in fixed income is not easy. Bond markets are massive and murky. Lots of firms throw a couple of flashy funds your way and call it a day. Vanguard takes a different approach. The Vanguard lineup includes over 80 bond funds actively managed by a 200-person global squad of sector specialists, analysts, and traders.

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