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Get a retirement plan that’s right for your business

Small-business owners have unique needs when it comes to saving for their retirement and helping their employees. 

We've recently announced that existing Individual 401(k), SIMPLE IRA, and SEP-IRA plans with multiple participants will be transferred to Ascensus. If you're just getting started, those plans can be established directly with Ascensus. Vanguard will continue to offer a one-person SEP-IRA.

Access your existing small-business retirement plan

Consider small-business retirement plans.

VANGUARD SEP-IRA (One person)

The SEP-IRA (Simplified Employee Pension) is the simplest option for small-business owners. Looking to open a SEP-IRA for only one person? We’ve got you covered.

View the Vanguard SEP-IRA

ASCENSUS Individual(k)

An Individual(k)—also known as Individual 401(k)—maximizes retirement savings if you're self-employed or a business owner with no employees other than your spouse. Ascensus also offers a Roth option.

ASCENSUS SIMPLE IRA

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

ASCENSUS SEP IRA (Multiple participants)

Ascensus offers a multi-participant SEP IRA that can support a business that employs others and provides access to a diverse lineup of Vanguard mutual funds.

Vanguard is only responsible for content on our own website.

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Size up your small-business retirement plan choices

Get to know retirement plans for small businesses. Try our interactive tool to see which plan may be best for you and your business.

An experienced provider to meet your needs

As we focus on areas where we can provide the highest value, we want to be sure your small-business plan thrives. Ascensus was founded more than 40 years ago with a singular purpose—to help people save for what matters. As an industry leader, they provide versatile capabilities, insights, and experience to meet your plan’s needs.

Industry leadership

As a leading provider of tax-advantaged savings and retirement solutions, you’ll benefit from Ascensus’s extensive retirement experience through all stages of your financial journey.

Ascensus’s market insights and educational resources—along with dedicated professionals serving small-business plans—will provide support for your personal and business success.

Delivering streamlined digital experiences with the needs of small businesses in mind, Ascensus's platforms are designed to provide flexibility, scalability, security, and cost-efficiency.

Vanguard funds

You'll have access to a diverse lineup of Vanguard mutual funds within your retirement account at Ascensus.

Ready to get started?

You can open a SEP-IRA at Vanguard if there is only one person. Give us a call so we can help you get started with your plan.

855-490-4668

Other plan types for small business owners can be opened directly through Ascensus. Visit their website to learn more.

All investing is subject to risk, including the possible loss of the money you invest.

Ascensus, LLC provides administrative and recordkeeping services. It is not a broker-dealer or an investment advisor and does not provide tax, legal, or accounting services. Ascensus® and the Ascensus logo are registered trademarks of Ascensus, LLC. Individual(k) is a trademark of Ascensus, LLC. ©2024 Ascensus, LLC. All Rights Reserved.

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Small Business Retirement Plan Options

The Saving Matters initiative, part of the U.S. Department of Labor's Retirement Savings Education Campaign, provides resources for employers and workers on retirement saving.

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Small Business Retirement Savings Advisor - Provides information to help small business owners understand their retirement savings options and determine which program is most appropriate for their needs.

Choosing a Retirement Solution For Your Small Business (PDF) - Provides information on retirement plan options.

Top 10 Ways to Prepare for Retirement (PDF) - Provides information on assessing your retirement needs, tax benefits of workplace savings plans, and Individual Retirement Accounts (IRAs).

Ten Warning Signs that Your 401(k) Contributions are being Misused (PDF)

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The Best Retirement Plan Options for Small Business Owners 2024

Regardless of their size, small businesses have many options for employee retirement plans they can offer as part of their benefits package.

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Table of Contents

What are employee retirement plans  .

Employee retirement plans help provide workers with income after they retire. These are viewed as a form of workplace benefit, and there are various ways that employers might structure their retirement plans and contribute to them on behalf of their employees. 

Editor’s note: Looking for the right employee retirement plan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

Choosing the right retirement plan for your small business starts with researching all of the options available to you and your employees. Analyze who your employees are and what retirement plan options make the most sense for them, then choose one that aligns with your small business needs and values.

What are the types of retirement plan types? 

Employers have options when it comes to offering retirement plans to their workers based on the size of their business, employees’ needs and other considerations. Here, we take a look at the various plans available.

Several different types of small business retirement plans are available and plan providers have affordable, accessible options designed for even very small businesses. There are also some tax advantages that can offset the expense of sponsoring a small business retirement plan.

Traditional 401(k)

This is perhaps the best-known type of retirement plan. The difference between individual retirement account (IRA) and 401(k) plans is that 401(k) plans allow employees to contribute a higher dollar amount to their accounts, to take out loans from their retirement savings and, usually, a choice of pretax and Roth contributions:

  • Cost per employee: Varies by plan provider. Look for all-inclusive providers that work with small businesses. Most charge a setup fee, monthly (or annual) administrative and per-participant fees and an investment or advisory fee. Plan participants pay exchange-traded fund (ETF) and mutual fund expense ratios as well as fund trades.
  • Contribution structure: Employee participation is optional and often allows them to make pretax contributions through salary deferrals or after-tax Roth contributions. Employer contributions are optional, but you can set a vesting schedule that allows you to reclaim a percentage of the business’ contributions if an employee leaves the company before a set time.
  • Roth 401(k) vs. traditional 401(k): A Roth 401(k) is a variation of the traditional 401(k) that allows plan participants to make after-tax contributions rather than pretax salary deferrals. After-tax contributions aren’t deductible since employees have already paid income tax on them. The advantage is that their money grows tax-free, so it isn’t taxed when they withdraw it.
  • 2023 contribution limits: $22,500 for employees or $30,000 for employees age 50 and older. Employers can contribute up to 25% of the employee’s compensation, but the contribution totals ― employee and employer contributions ― must not exceed $66,000 or $73,500 for employees age 50 and older who make catch-up contributions. This plan is subject to nondiscrimination testing, which ensures it doesn’t favor highly compensated employees. As such, the business owner and high-earning employees may need to reduce their contributions to pass this test.
  • Type of filing: You’re required to submit an Annual Return/Report of Employee Benefit Plan ― also known as IRS Form 5500 ― with this plan. As mentioned in the point above, this plan requires nondiscrimination testing.
  • Ideal for established small businesses that wish to use a vesting schedule to encourage talent retention or prefer not to match or contribute to employee retirement accounts.

Safe harbor 401(k)

A safe harbor 401(k) is a variation of the traditional 401(k) plan that isn’t subject to an annual IRS nondiscrimination test. This allows the business owner and highly compensated employees to make maximum contributions to their retirement accounts. However, employers are required to match or contribute to employee retirement accounts and these funds are immediately 100% vested:

  • Cost per employee: Varies by plan provider, but those offering all-inclusive plans for small businesses tend to be less expensive. Most charge a setup fee, monthly (or annual) administrative and per-participant fees and an investment or advisory fee. Plan participants pay ETF and mutual fund expense ratios, as well as fund trades.
  • Basic match where employee matches 100 percent of the first 3 percent of deferred compensation and a 50 percent match on the next 2 percent.
  • Enhanced match is when the company matches or exceeds the basic option. Typically, the employer gives a 100 percent match on the first 4 percent of deferred compensation.
  • Nonelective where the company contributes 3% or more of an employee’s compensation whether or not the worker opts for elective deferrals. 
  • 2023 contribution limits: $22,500 for employees or $30,000 for employees age 50 and older. Employers can contribute up to 25% of the employee’s compensation, but the total contribution, including employee and employer contributions, must not exceed $66,000 or $73,500 for employees age 50 and older who make catch-up contributions.
  • Type of filing: As with the traditional 401(k), you’re required to submit IRS Form 5500 with this plan. Nondiscrimination testing isn’t required.
  • Ideal for small businesses whose owners and high-earning employees want to invest aggressively in their retirement accounts.

Solo 401(k)

A solo 401(k) is a retirement savings plan designed for self-employed individuals who want to maximize their retirement contributions. It’s also referred to as an individual 401(k) or i401(k). Only the business owner and their spouse may participate in this type of plan; business owners with employees do not qualify for it:

  • Cost: Fees vary, depending on the plan provider. Some charge a setup fee and have monthly or annual administrative and advisory fees. Others don’t charge these fees but instead have ETF and mutual fund expense ratios and trading commissions. Some retirement plan providers require a minimum opening investment and charge service fees if your account balance doesn’t meet a certain threshold.
  • Contribution structure: You can contribute to this account as both the employee and employer. A Roth option for the employee contribution may be available, depending on the plan provider.
  • 2023 contribution limits: $22,500 for the employee contribution, plus a $7,500 catch-up contribution if you’re age 50 or over. The employer contribution limit is up to 25% of your compensation. However, the total defined contribution limit, which includes both employee and employer contributions, is $66,000 for 2023, not counting catch-up contributions.
  • Type of filing: If your plan has $250,000 or more in assets, you must submit IRS Form 5500-SF or 5500-EZ. Because you don’t have employees, nondiscrimination tests are not required.
  • Ideal for sole proprietors who wish to take full advantage of retirement savings opportunities.

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a small business retirement plan that is easy to set up and has low contribution and matching requirements for employers. It allows employees to contribute more than they could with traditional or Roth IRAs:

  • Cost per employee: There are usually no setup fees for this type of plan. Participating employees pay fund trades and expense ratios. Depending on the plan provider, there may be account service or maintenance fees.
  • Contribution structure: Employees have the option of contributing to their accounts through elective deferrals. There is no Roth option for this plan. Employers must either contribute 2% to all employee accounts or match 3% of employee contributions. Contributions are 100% vested. Self-employed people who choose this plan can contribute to it as both employee and employer.
  • 2023 contribution limit: $15,500 for employees; employees who are 50 and older can make an extra $3500 catch-up contribution. Employers aren’t allowed to exceed the 2% contribution or 3% match.
  • Type of filing: This plan doesn’t require employers to file IRS Form 5500 or submit to nondiscrimination testing.
  • Ideal for small businesses with 100 or fewer employees that want to keep their costs low and allow employee contributions.

A Simplified Employee Pension IRA (SEP IRA) is a retirement savings plan that’s inexpensive for employers to establish and easy to maintain. Employer contributions aren’t required annually, making it a good option for business owners who only want to contribute during high-profit years:

  • Cost per employee: There are usually no setup fees for this type of plan. Plan participants pay trading commissions and fund expense ratios. Depending on the plan provider, there may be account service or maintenance fees.
  • Contribution structure: Only employers may contribute to employee accounts. Contributions must be the same percentage of compensation for every participant. Employers aren’t required to contribute to accounts every year. Contributions are immediately 100% vested.
  • 2023 contribution limits: Up to $66,000 or 25% of compensation, whichever is less. There are no catch-up contributions allowed for this plan type.
  • Type of filing: The plan doesn’t require employers to file IRS Form 5500 or submit to nondiscrimination testing.
  • Ideal for businesses of all sizes that want a plan that is easy to set up and maintain and allows employers the flexibility of choosing which years they make contributions to employee accounts.

Traditional IRAs

IRAs are the simplest type of retirement accounts to set up. Furthermore, nearly everyone is eligible ― freelancers, business owners and even people who already have employer-sponsored retirement plans. This type of plan is a popular option for people who have 401(k) assets from previous jobs that they need to roll over into a new retirement account. There’s usually no cost to set up an IRA, but you will pay trading fees and fund expense ratios.

This type of retirement account allows you to make annual tax-deductible contributions, depending on your modified adjusted gross income and whether or not you have a workplace-sponsored account. Earnings on principal and interest accumulate on a tax-deferred basis:

  • 2023 contribution limit: $6,500. If you’re age 50 or older, you can contribute up to $7000.
  • Contribution rules: You can contribute to your account until age 70.5, at which time required minimum distributions (RMDs) apply. You can withdraw funds penalty-free at age 59.5. You must start taking distributions by April 1 of the year you turn 72. 
  • Ideal for individuals who anticipate that their tax rates will be lower during retirement years, as this account allows you to defer taxes until you withdraw your money.

This type of retirement account differs from traditional IRAs in that contributions aren’t deductible. Instead, you’ve already paid income taxes on the money you invest, allowing interest to grow tax-free. It also has no age limits on contributions and has different withdrawal rules:

  • 2023 contribution limits: $6,500. If you’re age 50 or older, you can make a $1,000 catch-up contribution.
  • Contribution rules: There’s no age limit on contributions so, unlike with traditional IRAs, you can continue contributing to your account past age 70.5. In addition to waiting until you’re age 59.5 to withdraw your funds, you must have established the account at least five years before you make withdrawals. However, there are no RMDs during your lifetime.
  • Ideal for individuals who expect higher tax rates during retirement years . Since Roth contributions have already been taxed, your money grows tax-free and there are no additional taxes to pay when you withdraw it.

As with all major financial decisions, consult your certified public accountant , tax advisor or financial advisor for retirement and investment advice specific to you and your business. The information in this article is general and shouldn’t be considered financial, legal or tax advice.

What are the best small business retirement plan options? 

Small businesses have a number of retirement plan options to consider. Here, we take a look at some of the best employee retirement plan options for small businesses.

USA 401k is a small, independent retirement benefits provider that offers services through a subsidiary of MassMutual. What sets them apart is their transparent pricing. ( See USA 401k review )

Paychex is an all-in-one human resources (HR) payroll and benefits solution that offers 401(k) and retirement services for businesses of all sizes. Small businesses can work with Paychex to build a customized plan based on their — and their employees’ needs. ( See Paychex Flex HR Software review )

ADP really stands out as the best employee retirement benefits provider for small businesses because of its comprehensive payroll, HR outsourcing and benefits services, which can all be integrated through the company’s SMARTSync Comprehensive Plan Automation. ( See ADP Employee Retirement review )

Human Interest

A dedicated employee retirement benefits provider that offers cost-effective and user-friendly services online. Employers can choose from three plans — Essentials, Complete and Concierge. ( See our Human Interest Employee Retirement review )

Fidelity Investments

Fidelity provides a wide array of services, including individual retirement accounts and employer-sponsored retirement plans. 

A relatively new company that has a particularly strong safe harbor 401(k) offering. 

One of the oldest and largest mutual fund companies in the world, Vanguard offers a wide range of mutual funds and ETFs for account holders to choose from. 

What are the retirement plan tax advantages for small businesses?

The government offers the Retirement Plans Startup Costs Tax Credit to help small businesses offer retirement plans to their employees. It allows you to deduct up to 50 percent or $500 of plan startup and administration costs for the first three years of your plan.

If you match or make contributions to employee accounts, that money is also tax deductible. It allows you to contribute to your own retirement savings plan and, like your employees, you have the option of elective deferrals that may allow you to lower your income tax bracket. Also, depending on your income, you may qualify for the Saver’s Credit .

Additional tax credits may soon be available as federal lawmakers seek to make retirement plans more accessible and affordable for small business owners. For example, one bill under consideration would provide a tax credit to small businesses that auto-enroll their workers in their retirement plans. [Related article: Retirement Savings Rules See Big Changes: What You Need to Know ]

Do small businesses have to offer employee retirement plans?

The short answer is no. No private businesses in the United States are required to offer retirement plans to their employees. Many companies offer retirement plans as part of benefits packages to help attract and retain talent. For smaller companies, offering retirement plans may help bring in new workers, but it also may be the right thing to do for your existing employees.

Depending on your situation, it’s important to consider how retirement plans will impact your business and its employees. Benefits like retirement plan options or healthcare can be a major tipping point for employees who are waffling between staying loyal to your company and taking their talents elsewhere. 

What type of employee retirement plan should I choose? 

If you have employees and want …

  • To set a vesting schedule that encourages employee retainment, check out a traditional 401(k) .
  • To avoid nondiscrimination testing, so you and your highly compensated employees can aggressively save for retirement, think about a safe harbor 401(k) .
  • A simple plan that allows your employees to make contributions, look into a SIMPLE IRA .
  • To choose which years you contribute to employee retirement accounts ― for example, if your business profits fluctuate from year to year ― consider a SEP IRA .

If you’re a sole proprietor and want …

  • To save as much money for retirement as allowed and contribute as both an employee and the employer, look into a solo 401(k) .
  • To save as much money for retirement as allowed, but only want to make employer contributions, check out a SEP IRA .
  • For a simple retirement plan that’s easy to set up, consider a traditional IRA .

For a simple after-tax plan that allows your money to grow tax-free, look into a Roth IRA .

Offer a benefit that keeps on giving

Small businesses can earn big benefits from offering employees retirement plan options to ensure a comfortable retirement. With many plan options available, you’re sure to find one that meets your company’s ― and your employees’ needs. 

Linda Pophal contributed to this article.

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3 retirement plan solutions for small businesses—from start-ups to $10M AUM

Employee turnover increased for the nation’s small businesses due to COVID-19. A recent survey by Principal ® of more than 1,000 small business owners revealed a 20% uptick over the past 12 months, reaching its highest level in years.

Recruiting and retaining employees is more important than ever. Retirement savings plans can round out a strong benefits offering and help more people make progress and potentially achieve financial security.

Small business owners saw a 20% uptick in employee turnover the past 12 months.

We offer a wide range of retirement plan solutions to meet your clients’ needs, along with outcome-oriented tools, and guidance. As a small business grows or their needs change, they can transition from one solution to another without changing providers.

These four options deliver flexibility and scalability to your small business clients. Here’s how they break down.

Start-up plans with fewer than 100 employees

Simply Retirement by Principal ® —100% online from plan design and purchase to onboarding and administration.

Less time. You can create, customize, and send proposals to clients online so you save time on paperwork. Or you can walk them through the steps to do it online themselves. Either way, you can set up a 401(k) plan for a small business without investing a lot of time and resources.

Extra support. Once it’s set up, clients receive help with tasks such as compliance testing and reporting.

Expand your business. This streamlined solution allows you to connect with more small business clients and build relationships you may not have had before.

Guidance from you. Many small business owners don’t feel comfortable navigating retirement plans on their own. That’s where your expertise still comes in—to handle questions, give guidance, and help them get started.

Simple pricing. A retirement plan for less than $6 a day 1 . Low, flat-fee recordkeeping pricing that doesn’t change as your client’s plan assets change. It’s a predictable cost that can help with budgeting. Visit SimplyRetirement.com for pricing details. 2

Tax credit. There are SECURE Act tax credits up to $5,000 per year, which can help offset expenses of the plan for the first three years .

State requirements. This product may help small businesses meet any state mandates to offer a retirement solution to their employees.

1 Based on $175/month plan sponsor recordkeeping fee only (after $500 one-time setup fee), when plan sponsor elects to have $6 per participant recordkeeping fee and any applicable financial professional compensation deducted from participant accounts. If working with a TPA, the plan sponsor recordkeeping fee is $135/month, which assumes the TPA will provide select administrative services and bill their fees separately.

2 Fees paid by the business owner are billed quarterly. Fees paid by participants are deducted monthly from participant accounts. Participant fees are charged if the individual balance is greater than $100 on the fee assessment date and 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% - 0.94%, as of July 31, 2021). Financial professional compensation and TPA fees are also additional and may be billed to the business owner or deducted from participant accounts.

Learn what a digital 401(k) solution can do for you and your clients.

Start-up plans to $25 million in AUM

Principal ® EASE —A new option for employers who want to join a Pooled Employer Plan (PEP).

New solution. Since this was just launched January 1, 2021, it gives you a new option to talk about with employers and associations.

Your guidance is needed. You’ll help explain the PEP approach and guide employers through streamlined plan decisions and flexible options available to them.

PEPs are trending. More than one-third of defined contribution plan sponsors (38%), both large and small, reported they may look to join a PEP or multiple employer plan (MEP) in the next two years. 1

Increased efficiencies. The SECURE Act allows unrelated employers to participate in a single, pooled, employer plan (PEP). By combining efforts in this group 401(k) arrangement, they outsource administrative tasks and free up valuable time to focus on their business.

Added expertise. Clients rely on experienced financial professionals to service the plan and manage the investment lineup.

Reduced risk. Your clients shift risk to designated fiduciaries along with related tasks. As the Pooled Plan Provider (PPP) and 3(16) Plan Fiduciary, Principal ® has a professional, experienced fiduciary committee provide governance oversight for the PEP’s plan administration.

See how your clients can benefit from a Pooled Employer Plan.

Plans with up to $1 million in AUM

Principal ® Flex and Principal ® Flex-Open —Investment flexibility and simplified fee structure.

Saves time. Two streamlined packages help you easily arrive at ballpark baseline cost, with fewer inputs. You can quickly evaluate plans with a transparent cost structure.

Flexible compensation. There’s flexibility in advisor compensation arrangements: fee-based or flat commission-based scales.

Investment options. Working with you, they choose to use either a Principal sub-advised investment option lineup (Principal ® Flex), or an open architecture investment approach (Principal ® —Open). It’s based on zero revenue sharing investment options, but other share classes and rate levels are available.

Custom features. They can offer participant services and additional customizable plan features typically enjoyed by larger organizations.

Choices offered. How they collect and pay the administrative costs of the plan is flexible.

Added services. Clients can easily add a compatible investment fiduciary service.

Choose a streamlined approach with a Third Party Administrator (TPA) or without a TPA .

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Get started.

We make it easy for you to get information, resources, and support to help your clients. Here are questions and suggested responses to start and guide your conversation with employers .

Contact your local Principal ® representative or support team: Call 800-952-3343 or email our Advisor Support Team . You can also connect with us by filling out a form on our web site.

1 Escalent. Cogent Syndicated. Retirement Planscape ® Survey, May 2020.

2 Principal reporting as of 12/31/2020.

Intended for Financial Professional Use

The subject matter in this communication is educational only and provided with the understanding that Principal ® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other financial professionals or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754 ,   member SIPC   and/or independent broker/dealers. Principal Life, and Principal Securities are members of the Principal Financial Group ® , Des Moines, Iowa 50392. Certain investment options and contract riders may not be available in all states or U.S. commonwealths.

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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.

Individually designed plan.

Other plan requirements.

Quarterly installments of required contributions.

Installment percentage.

Extended period for making contributions.

Contributions deadline.

Defined benefit plan.

Defined contribution plan.

Employee Contributions

Employer's promissory note.

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.

Partnership.

Restriction on conditions of participation.

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

Elective deferrals, reporting requirements.

Minimum distribution.

Required beginning date.

Distributions after the starting year.

Distributions after participant's death.

Qualified reservist distributions.

Eligible rollover distribution.

Rollover of nontaxable amounts.

Withholding requirement.

Exceptions.

Estimated tax payments.

Section 402(f) notice.

Timing of notice.

Method of notice.

Tax on failure to give notice.

Lump-sum distribution.

Excise Tax on Reversion of Plan Assets

Notification of significant benefit accrual reduction.

Disqualified person.

Amount involved.

Tax period.

Payment of the 15% tax.

Correcting a prohibited transaction.

Correction period.

Form 5500-SF.

Form 5500-EZ.

One-participant plan.

Form 5500-EZ not required.

Electronic filing of Forms 5500 and 5500-SF.

Form 8955-SSA.

Rate Table for Self-Employed.

Rate Worksheet for Self-Employed.

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What is TAS?

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Low Income Taxpayer Clinics (LITCs)

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 .

Photographs of missing children. The IRS is a proud partner with the National Center for Missing & Exploited Children® (NCMEC) . Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

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

Due date of employer's return (including extensions). Smaller of $66,000 or 25% of participant's compensation. 25% of all participants' compensation. Any time up to the due date of employer's return (including extensions).
30 days after the end of the month for which the contributions are to be made.

Due date of employer's return (including extensions).
Salary reduction contribution up to $15,500; $19,000 if age 50 or over.


dollar-for-dollar matching contributions, up to 3% of employee's compensation, fixed nonelective contributions of 2% of compensation.
Same as maximum contribution. Any time between January 1 and October 1 of the calendar year.

For a new employer coming into existence after October 1, as soon as administratively feasible.

Due date of employer's return (including extensions).



Profit-Sharing Plan: Due date of employer's return (including extensions). Money Purchase Pan: 8 1/2 months after the end of the plan year.

Elective deferral up to $22,500; $30,000 if age 50 or over.


Money Purchase Pension Plan: Smaller of $66,000 or 100% of participant's compensation.

Profit-Sharing: Smaller of $66,000 or 100% of participant's compensation.

25% of all participants' compensation, plus amount of elective deferrals made.
By the employer’s tax-filing due date, including extensions, for the taxable year.
Contributions must generally be paid in quarterly installments, due 15 days after the end of each quarter, with a final contribution due 8 1/2 months after the end of the plan year. See in chapter 4. Amount needed to provide an annual benefit no larger than the smaller of $265,000 or 100% of the participant's average compensation for the highest 3 consecutive calendar years. Based on actuarial assumptions and computations. By the employer’s tax filing due date (although it’s not best to set up after the minimum funding due date).
Net earnings from self-employment must take the contribution into account. See in chapters and .
Compensation is generally limited to $330,000 in 2023.
Under a SIMPLE 401(k) plan, compensation is generally limited to $330,000 in 2023.
Certain plans subject to Department of Labor (DOL) rules may have an earlier due date for salary reduction contributions and elective deferrals, such as 401(k) plans. See the “elective deferral” definition in , later. Solo/self-employed 401(k) plans are non-ERISA plans and don’t fall under DOL rules.

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.

  The elective employer contributions
(excluding certain catch-up contributions)
paid to the SEP for the employee for the year
 
  The employee's compensation
(limited to $330,000 in 2023)
 

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.

Salary reduction contributions
($25,000 × 5% (0.05))
$1,250
Employer matching contribution
($25,000 × 3% (0.03))
   

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

Salary reduction contributions
($40,000 × 10% (0.10))
$4,000
Employer matching contribution
($40,000 × 3% (0.03))

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.

Salary reduction contributions
($36,000 × 10% (0.10))
$3,600
2% nonelective contributions
($36,000 × 2% (0.02))
   

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

Salary reduction contributions
($50,000 × 10% (0.10))
$5,000
2% nonelective contributions
($50,000 × 2% (0.02))

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.

Salary reduction contributions
(maximum amount allowed)
$12,500
2% nonelective contributions
($75,000 × 2% (0.02))

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.

Year Participants' compensation Employer contribution Deductible
limit for current year (25% of compensation)
Excess contribution carryover
used
Total
deduction including carryovers
Excess contribution carryover available at
end of year
2020 $1,000 $100 $250 $ 0 $100 $ 0
2021 400 165 100 0 100 65
2022 500 100 125 25 125 40
2023 600 100 150 40 140 0

There were no carryovers from years before 2016.

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

  Step 1      
    Enter your net profit from Schedule C (Form 1040), line 31; Schedule F (Form 1040), line 34;* or Schedule K-1 (Form 1065),* box 14, code A.** For information on other income included in net profit from self-employment, see the Instructions for Schedule SE (Form 1040) _____
    * Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b.  
    ** General partners should reduce this amount by the same additional expenses
subtracted from box 14, code A, to determine the amount on line 1 or line 2 of
Schedule SE (Form 1040).
 
  Step 2      
    Enter your deduction for self-employment tax from Schedule 1 (Form 1040), line 15 _____
       
  Step 3      
    Net earnings from self-employment. Subtract step 2 from step 1 _____
  Step 4      
    Enter your rate from the Rate Table for Self-Employed Rate Worksheet for Self-Employed _____
  Step 5      
    Multiply step 3 by step 4 _____
  Step 6      
    Multiply $330,000 by your plan contribution rate (not the reduced rate) _____
  Step 7      
    Enter the of step 5 or step 6 _____
  Step 8      
    Contribution dollar limit
       
       
  Step 9      
    Enter your allowable elective deferrals (including designated Roth contributions) made to your self-employed plan for the 2023 plan year. Don't enter more than $22,500 _____
  Step 10      
    Subtract step 9 from step 8 _____
  Step 11      
    Subtract step 9 from step 3 _____  
  Step 12      
    Enter one-half of step 11 _____
  Step 13      
    Enter the of step 7, step 10, or step 12 _____
  Step 14      
    Subtract step 13 from step 3 _____
  Step 15      
    Enter the of step 9 or step 14 _____
       
       
  Step 16      
    Subtract step 15 from step 14 _____
  Step 17      
    Enter your catch-up contributions (including designated Roth contributions), if any. Don't enter more than $6,500 _____
  Step 18      
    Enter the of step 16 or step 17 _____
  Step 19      
    Add steps 13, 15, and 18 _____
  Step 20      
    Enter the amount of designated Roth contributions included on steps 9 and 17 _____
  Step 21      
    Subtract step 20 from step 19. This is your _____
           
  Enter your actual contribution, not to exceed your maximum deductible contribution, on Schedule 1 (Form 1040), line 16.  

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

1) Plan contribution rate as a decimal (for example, 10½% = 0.105) _____
2) Rate in line 1 plus 1 (for example, 0.105 + 1 = 1.105) _____
3) Self-employed rate as a decimal rounded to at least 3 decimal places (line 1 ÷ line 2) (for example, 0.105 ÷ 1.105 = 0.095)  

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


If the plan contri-
bution rate is:

Your
rate is:
1 0.009901
2 0.019608
3 0.029126
4 0.038462
5 0.047619
6 0.056604
7 0.065421
8 0.074074
9 0.082569
10 0.090909
11 0.099099
12 0.107143
13 0.115044
14 0.122807
15 0.130435
16 0.137931
17 0.145299
18 0.152542
19 0.159664
20 0.166667
21 0.173554
22 0.180328
23 0.186992
24 0.193548
25* 0.200000*
* The deduction for annual employer contributions (other than elective deferrals) to a SEP plan, a profit-sharing plan, or a money purchase pension plan can't be more than 20% of your net earnings (figured without deducting contributions for yourself) from the business that has the plan.

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.

  Step 1      
    Enter your net profit from Schedule C (Form 1040), line 31; Schedule F (Form 1040), line 34;* or Schedule K-1 (Form 1065),* box 14, code A.** For information on other income included in net profit from self-employment, see the Instructions for Schedule SE (Form 1040)
    * Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b.  
    ** General partners should reduce this amount by the same additional expenses
subtracted from box 14, code A, to determine the amount on line 1 or line 2 of
Schedule SE (Form 1040).
 
  Step 2      
    Enter your deduction for self-employment tax from Schedule 1 (Form 1040), line 15
       
  Step 3      
    Net earnings from self-employment. Subtract step 2 from step 1
  Step 4      
    Enter your rate from the Rate Table for Self-Employed Rate Worksheet for Self-Employed
  Step 5      
    Multiply step 3 by step 4
  Step 6      
    Multiply $330,000 by your plan contribution rate (not the reduced rate)
  Step 7      
    Enter the of step 5 or step 6
  Step 8      
    Contribution dollar limit
       
       
  Step 9      
    Enter your allowable elective deferrals (including designated Roth contributions) made to your self-employed plan for the 2023 plan year. Don't enter more than $22,500
  Step 10      
    Subtract step 9 from step 8 _____
  Step 11      
    Subtract step 9 from step 3 _____  
  Step 12      
    Enter one-half of step 11 _____
  Step 13      
    Enter the of step 7, step 10, or step 12 _____
  Step 14      
    Subtract step 13 from step 3 _____
  Step 15      
    Enter the of step 9 or step 14 _____
       
       
  Step 16      
    Subtract step 15 from step 14 _____
  Step 17      
    Enter your catch-up contributions (including designated Roth contributions), if any. Don't enter more than $6,500 _____
  Step 18      
    Enter the of step 16 or step 17 _____
  Step 19      
    Add steps 13, 15, and 18 _____
  Step 20      
    Enter the amount of designated Roth contributions included on steps 9 and 17 _____
  Step 21      
    Subtract step 20 from step 19. This is your
           
    Enter your actual contribution, not to exceed your maximum deductible contribution, on Schedule 1 (Form 1040), line 15.  

See the filled-in Deduction Worksheet for Self-Employed later.

1) Plan contribution rate as a decimal (for example, 10½% = 0.105)
2) Rate in line 1 plus 1 (for example, 0.105 + 1 = 1.105)
3) Self-employed rate as a decimal rounded to at least 3 decimal places (line 1 ÷ line 2) (for example, 0.105 ÷ 1.105 = 0.095) 0.078

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:

Under Portion of Schedule S.E. (Form 1040)"Section A--Short Schedule S.E. Caution. Read above to see if you can use Short Schedule SE.":
"2. Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-1 (Form 1065), box 14, code A (other than farming); and Schedule K-1, (Form 1065-B), box 9. Ministers and members of religious orders, see page S.E.-1 for amounts to report on this line. See page S.E.-3 for other income to report" field contains 200,000
"3. Combine lines 1a, 1b, and 2" field contains 200,000
"4. Net earnings from self-employment. Multiply line 3 by 92.35% (.9235). If less than $400, don't file this schedule; you don't owe self-employment tax" field contains 184,700
"5. Self-employment tax. If the amount on line 4 is: $102,000 or less, multiply line 4 by 15.3% (.153). Enter the result here and on Form 1040, line 57; More than $102,000, multiply line 4 by 2.9% (.029). Then, add $12,648.00 to the result. Enter the total here and on Form 1040, line 57" field contains 18,004
"6. Deduction for one-half of self-employment tax. Multiply line 5 by 50% (.5). Enter the result here and on Form 1040, line 27" field contains 9,002
"27. One-half of self-employment tax. Attach Schedule S.E." field contains 9,002
"28. Self-employed, S.E.P., S.I.M.P.L.E., and qualified plans" field contains 14,898

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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ProfitableVenture

How to Set Up a Pension Plan for a Small Business

By: Author Tony Martins Ajaero

Home » Grow your Business » Strategic Planning

Running a small business or being self-employed can offer flexibility, freedom and control over your earning potential. While the perks are plentiful, there’s one thing that is usually missing when you own a small business: an employer-sponsored pension plan. Creating pension plans for your small business might be a smart move as a small business owner. Pension plans are retirement plans in which an employer contributes to employees’ retirement funds. Usually, they promise a specific amount of benefits at retirement.

Unlike defined contribution plans such as 401(k)s, in which employees set aside a certain amount or percentage of their salary each month for retirement, defined benefit plans guarantee a certain amount for employees at retirement based on length of service and other factors. This creates more certainty for employees about their retirement funds. But according to statistics, the percentage of workers in the private sector with these pension plans has reduced drastically since the 1990s, propelled by employer attempts to reduce costs, regulatory changes and other reasons. These factors have obscured some of the benefits of pension plans, both for small-business owners and their employees.

Making a pension plan part of your small business benefit package is a strategy that can help you lure more talented employees, increase employee retention and set your business apart from the competition. As employers look for ways to differentiate themselves in the war for talent, a defined benefit plan can be a selling point. One advantage to pension plans is that they can be funded on a profit-sharing basis. If employees know their retirement is tied into results, it can motivate them to increase productivity. Pension plans enable owners to contribute much more to their own retirement funds than other plans.

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The pension’s higher contribution limit is a wonderful way for small-business owners who have neglected to save for retirement to catch up and it is especially beneficial for small companies with a few younger, low-paid employees. Just like 401(k) plans and IRAs, self-funded pension plan contributions are tax-deferred for small-business owners, which allow them to pay taxes upon distribution, when their taxable income is likely lower. There are numerous benefits of setting up pension plans for your business, read on to understand the various options available and the best ways to set it up.

Available Pension Plan Options for Small Businesses

There are different types of small business pension plans to choose from when creating a pension plan, such as the “defined benefits plan” and “defined contribution plan.” But another distinction is whether the plan is qualified or unqualified. Qualified plans, like the 401k, let you take a tax deduction when you’re still contributing to the plan. So when employees retire and start using their pension plans, they will be taxed on the money that comes from it. Non-qualified plans are funds made up of after-tax money. A Certificate of Deposit (CD) is one example of a non-qualified plan. When the employee retires and withdraws the funds from the small business pension plan, it will not be taxed again. There are various ways to save for retirement for you and your employees as a small business owner. Below are three of the most popular options to compare:

Simplified Employee Pension Plan (SEP IRA)

A SEP IRA can be formed by any sized business, including sole proprietorships, partnerships and corporations. You can set up one of these accounts for yourself and/or on behalf of your employees. Note that if you create a SEP IRA for your employees, only you as the employer can make contributions to it, on their behalf; they’re not allowed to put anything in directly.

According to reports, the annual contribution limit for a SEP IRA in 2019 is 25 percent of the employee’s annual compensation or $56,000, whichever is less. There is no catch-up contribution for SEP accounts. Have it in mind that IRS doesn’t allow loans from SEP IRAs, but employees and business owners can take in-service distributions. Contributions are always 100 percent vested. If distributions are non-qualified then income tax applies. The 10 percent early withdrawal penalty also kicks in if the person taking the distribution is under age 59 ½.

On the benefit side, a SEP IRA is comparatively easy and inexpensive for small business owners to set up. The annual contribution limits mirror the limits allowed by traditional 401(k) plans. Contributions can be deducted from income and qualified distributions are taxed according to traditional IRA rules. In this plan you’re not obligated to contribute to a SEP IRA for yourself or your employees each year. But if you do decide to contribute on behalf of your employees, you have to make a contribution for everyone who worked for you for the year.

Savings Incentive Plan for Employees (SIMPLE IRA)

This option is also available to any small business but according to the IRS, it is generally best suited to those with 100 employees or less. With this plan, the employer is expected to contribute money each year for each employee by either matching up to 3 percent of compensation or making a 2 percent non-elective contribution. Employees can contribute but aren’t expected to and they’re always 100 percent vested in their SIMPLE IRA money. For 2019, the maximum employees can contribute is $13,000, or $16,000 if they’re aged 50 or older.

Just like SEP IRAs, SIMPLE IRAs have the same tax treatment as traditional IRA accounts. Early distributions are subject to the early withdrawal penalty and income tax; regular retirement distributions after age 59 ½ are taxed at ordinary income tax rates only. Both SEP IRAs and SIMPLE IRAs require the account owner to begin taking required minimum distributions at age 70 ½ to avoid a tax penalty. This pension plan option is also easy to set up and maintain. But they have lower annual contribution than SEP IRAs or solo 401(k)s (the next option on this list). You also don’t have the option to not make contributions for your employees with a SIMPLE IRA. This could be problematic if your cash flow is irregular from year to year.

Solo or Individual 401(k)

A solo 401(k) is a 401(k) that is designed just for sole proprietors. (The only exception is if you own a business and your only employee is your spouse.) Note that with this type of small business retirement plan, you are expected to make contributions as the employer and the employee. As the employee, you can contribute up to $19,000 for 2023 or up to $25,000 if you’re 50 or older. As the employer, you can contribute up to 25 percent of compensation, unless you’re self-employed.

Howbeit, you have to use a special formula to calculate your employer contribution for the year. The formula is based on your net earnings after you’ve deducted one-half of your self-employment tax and your employee contributions. Meanwhile, of all three small business retirement plans discussed so far, a solo 401(k) is the most difficult to set up and the most expensive to maintain. But you get the benefit of a tax deduction for your contributions, as well as generous annual contribution limits. You could also supplement your 401(k) with contributions to an IRA.

Step By Step Guide on How to Set Up a Pension Plan for Your Small Business

To avoid some of the most common mistakes new business owners make when setting up their first pension plan, consider the following steps:

Contact a financial advisor

A financial advisor can be a great partner in retirement planning, helping you nail down your retirement timeline and building an investing plan to get you there. Finding the right financial advisor that fits your needs doesn’t have to be hard. There only platforms and experts everywhere in the United States. Take time to consider how much money you’ll need to retire comfortably. A retirement calculator can help you pin down how much you need to retire and how much you need to save to get you there.

Review the options available to you with the financial advisor

Experienced business owners can often get away with building their own pensions, but as a new business owner, don’t try it. Get the help you need from an experienced pension expert to ensure you’re getting the best deal and choosing the best option for your company. The most common small business pension plans just like we stated above are SEP Individual Retirement Accounts, SIMPLE IRAs and 401k plans. The one best-suited to your situation depends in large part on what your company can afford. Some are funded entirely by employer contributions, some entirely by employee contributions, and some by a combination of both. Be sure to review the costs associated with each plan and the tax savings that could benefit your business bottom line. Though it is important to understand the startup costs associated with each plan, it is more important to understand the fees you’ll be subjected to throughout the life of your plan.

Contact a plan administrator

Contact a pension plan administrator, even with the help of your financial adviser, to open your small business retirement plan. Ask your bank, accountant or business attorney if they have firms they can recommend that function as plan administrators. If you have no recommendations, contact a brokerage firm with whom you may already be doing personal investing, and ask for the small business planning department. File IRS Form 5300, Application for Determination for Employee Benefit Plan. You can find this form along with instructions on how to fill it out the IRS website at IRS.gov.

Get a tax credit for setting up a plan

If you don’t yet have a plan but set one up to cover at least one employee who is not an owner or spouse (“a non-highly compensated employee”) and you don’t have more than 100 employees, then you may be eligible for a tax credit for small employer pension plan startup costs. While the name of the credit implies it is for a pension plan, it can be used for a 401(k) or any other qualified retirement plan. The credit is 50 percent of startup costs up to a top credit of $500. The credit can be claimed for the first three years of the plan. And you can even start to claim the credit in the year prior to the start of the plan.

Give notice of plan participation to employees

Notably, you must give notice to employees of their eligibility to participate in a plan. The time frame for the notice and the required content depends on the type of plan offered. For instance, in the case of a SIMPLE IRA, you must give each employee the following information before start of the election period (generally from November 2 through December 31 for a plan starting on the following January 1):

  • The employee’s opportunity to make or change a salary reduction choice.
  • The employer’s type of contribution (matching contribution, which is keyed to the employee contribution, or non-elective contribution, which is independent of any employee contribution).
  • A description of the plan from the financial institution hosting it.
  • A written notice that the employee’s balance can be transferred without cost or penalty if the employee uses a designated financial institution.

Before you get started, know that there are costs involved. Pension plans have long-term benefits, but won’t be cheap to set up. Annual administration fees are often higher than those of other retirement plans. You’ll need to pay an actuary to calculate employee funding levels annually. And if your business needs a lot of liquid capital, pension plans may not be the right fit. But for many small-business owners, the retirement-savings benefit of a pension plan make it a good option.

Creating a pension plan for your employees is up to you. You might find that there are plenty of benefits to offset the cost to your business, including motivation and loyalty of your employees. Whatever you decide, remember that there’s no better time to start saving for retirement than now. The longer you wait to choose a retirement plan for your small business, the less time your money has to grow.

More From Forbes

How you can use retirement funds to start a business.

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Entrepreneurship is one of the most important developments of modern economic life. Entrepreneurs help create new companies, which spur economic growth, create jobs, and introduce new technologies, products and services that improve our living standards and quality of life.

Starting a new business or franchise is not easy and is quite risky. Hundreds of thousands of small businesses open and close every year. In addition, about 20% of businesses fail in their first year, and about half of all businesses close after five years.

For many people, the hardest part is not coming up with a business idea or a potential business to buy, but finding the capital needed to start or buy the business. Too often, an entrepreneur doesn’t even know that using retirement funds could be an option for investing in a new business.

Funding new business ventures has become a popular TV phenomenon. As the producers of the reality show Shark Tank know, watching would-be entrepreneurs market their business ideas, products or services has become extremely popular with the American public.

The first place entrepreneurs typically start when looking to fund a startup is personal savings . If they do not have sufficient personal savings, then third-party loans, such as Small Business Association loans, are a popular option. However, if acquiring a loan is not viable for you, then seeking third-party investors is often the last resort.

Unfortunately, in my experience, far too many entrepreneurs are not aware that the use of a retirement account as a business funding source could end up being the most tax-efficient option. In general, there are three ways retirement funds can be used to start or fund a business:

Taxable Distribution

In the case of an individual retirement account, or IRA, you may take a taxable distribution at any time. However, taxes will be due, and an early distribution penalty will apply if you are younger than 59 ½. Roth IRA distributions are tax- and penalty-free at that age. Before that, only contributions made to the Roth can be withdrawn without consequences.

Unlike an IRA, a 401(k) qualified plan or other pension plan must satisfy certain “ triggering rules ” before the funds are accessible. Essentially, one must reach the age of 59 ½, separate from their job, or suffer a hardship before gaining access to the plan funds for distribution purposes.

The downside of taking a distribution from your retirement plan is you are taking out funds that are growing in a tax-advantaged way. Moreover, if you are younger than 59 ½, you will be hit with that 10% early withdrawal penalty.

401(k) Plan Loan

If your 401(k) plan allows for a loan , then you would be able to borrow the lesser of $50,000 or 50% of your account value. The proceeds of the loan can be used for any purpose, including starting a new business. You will generally have up to five years to repay the loan. Payments must be made at least quarterly, at an interest rate of at least prime , which stands at 4.75% as of this writing.

The advantage of using the loan option to fund a business is you can get tax- and penalty-free use of your 401(k) savings. Further, you avoid paying a higher rate with an outside lender, and all interest is paid back to the plan.

However, you are limited in the amount of funds you can borrow. If your 401(k) balance sits at $50,000, you may only borrow half that amount — not exactly a ton of money to work with. As with the taxable distribution, any money borrowed from the plan will not be earning from other investments.

The Rollovers as Business Start-Ups project (ROBS) allows you to use your retirement funds tax- and penalty-free. There’s no limit as to how much of your funds you may use. Plus, you are allowed to personally be involved in the business and take a salary, without breaking any of the prohibited transaction rules.

The ROBS option typically involves the following sequential steps:

1. An entrepreneur establishes a new C Corporation.

2. The C Corporation adopts a 401(k) plan, which can invest in company stocks, called “ qualifying employer securities .”

3. The entrepreneur rolls over or transfer funds from their retirement plan into the new 401(k) plan.

4. The C Corporation’s stock can then be purchased at fair market value.

5. And finally, the sale of the stock generates the capital needed to fund the business.

It is important to note you must use a C Corporation when setting up a ROBS. You cannot utilize a limited liability corporation, sole proprietorship or any other type of entity. The drawback of the C Corporation is the double taxation. The business gets taxed first, and then, the shareholders also get taxed.

Which Is Right For You?

Each of these three concepts has both positives and negatives. A lot of factors go into deciding which path to take, including how much money you have and need, where your money is and your age. But if all other options seem out of reach, looking at your retirement savings may provide the boost you need to go from an employee to calling the shots as the boss.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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How to Create Your Own Pension Plan

Want a set amount of income when you retire you don't have to work for a big, old-school company to get it..

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Once upon a time, in a business land far, far away, there were things called pensions. You worked hard for a company, racked up the years, and when you retired you received a check every month for the rest of your life--the more years you put in, the bigger the check.

My generation is probably the last to think of pensions as a common employee benefit. I worked for a big company for 17 years and I'm vested in its pension plan; knowing I can count on getting a check every month is pretty cool.

Now relatively few companies offer pension plans. (My kids don't even know what the word means.) The average company seeking to help employees prepare for retirement is much more likely to contribute to their employees' 401(k) plans.

And if you own your own business, why even think about a pension, right?

"Business owners have a unique opportunity to coordinate business planning and personal planning," says Marc Scudillo , managing officer of EisnerAmper Wealth Management . "Most entrepreneurs focus on business planning, but when you coordinate both, you have the ability to create a number of benefits that can funnel back to the entrepreneur."

You're familiar with the concept. Maybe you write off a car. Maybe you find creative ways to fold a personal vacation into a business trip. But those are short-term planning vehicles.

Why not think long term and create what Marc calls a "portable pension"?

How It Works

If you aren't familiar, a pension is like an annuity: You contribute a specific amount and at a specified time in the future start receiving a predefined income stream. A pension differs from, say, a 401(k) in that the company underwriting the annuity is obligated to pay that income stream regardless of how the investments within the account performed. They're also obligated to pay that income stream regardless of how long you live. That's the risk they take.

For an investor, the downside of an annuity is that the upside is limited; normally, if the investments do extremely well you don't participate in the upside beyond the predefined income stream.

Like most things it's a trade-off: You give up some upside possibility in return for the guarantee of a set return.

But the loss of upside has lessened. "Now there are programs where the provider takes on the obligation of providing a future income stream while also providing some degree of upside opportunity if the market outperforms expectations," Scudillo says. "Variable annuities with income guarantees provide income certainty and upside potential. That lets a business owner shift the downside risk of the markets to a third party while retaining the opportunity to participate in higher returns."

Because you get to offset risk, "portable pensions" do come with higher costs than traditional investments, though.

"Many entrepreneurs decide that a slightly higher cost is definitely worth the benefits of a guaranteed income for themselves and their family," Scudillo says. "If your spouse is a lot younger, the survivor benefits can dramatically increase the value of the plan--again, without the risk of traditional investments."

You can invest existing retirement funds (including Roth IRAs) or non-retirement assets, or make monthly contributions to a plan--the combinations are nearly endless. So talk to a financial professional to ensure your plan makes sense from both a personal and a business perspective.

"Successful entrepreneurs who have the right assets, the right cash flow, and the right operations can use a variable annuity to create a wonderful pension plan," Scudillo says. "And since it's portable you can take it wherever you go, whether you start another business or go back to corporate life.

"Taxes may increase, inflation may rise, markets may fall... who knows what will happen. When you're retired, one thing you will be able to count on is your portable pension."

The Daily Digest for Entrepreneurs and Business Leaders

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  • Step 1: Understand the Basics
  • Step 2: Enroll in the Plan
  • Step 3: Choose Your Contribution
  • Step 4: Employer Matching
  • Step 5: Select Your Investments
  • Step 6: Monitor and Adjust
  • The Bottom Line
  • Retirement Planning

How to Set Up a 401(k): A Step-by-Step Guide

Karon Warren has 20+ years of experience researching and writing about banking, mortgages, credit cards, savings, and other personal finance topics.

how to start a pension plan for a small business

Katie Miller is a consumer financial services expert. She worked for almost two decades as an executive, leading multi-billion dollar mortgage, credit card, and savings portfolios with operations worldwide and a unique focus on the consumer. Her mortgage expertise was honed post-2008 crisis as she implemented the significant changes resulting from Dodd-Frank required regulations.

how to start a pension plan for a small business

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A 401(k) plan is an employer-sponsored retirement account that offers tax advantages to help employees save for retirement. Many employers contribute to their employees’ 401(k)s, which helps maximize savings. Most companies make it relatively simple to sign up, but you'll need to do your research first.

Key Takeaways

  • A 401(k) plan is a retirement savings account that employers offer.
  • You must meet eligibility requirements to enroll in a 401(k) plan.
  • Choosing the right contribution amount and taking advantage of employer matching is crucial for maximizing retirement savings.
  • Selecting appropriate investment options based on risk tolerance and regularly monitoring the plan is essential for long-term success.

Step 1: Understand the Basics of a 401(k) Plan

All 401(k) plans work essentially the same: You contribute to your plan through payroll deductions. Some employers may use automatic deductions to facilitate more participation in 401(k) plans. This means that your employer may automatically deduct a certain amount or a percentage of your wages to put into a 401(k), unless you proactively change it or opt out. The type of 401(k) plan you have determines if your contribution is made with pre- or post-tax dollars. 

Types of 401(k) Plans 

Traditional : Contributions are made with pre-tax dollars, reducing your taxable income, and saving you money on your annual income taxes . However, these funds will be taxed when you withdraw them during retirement. In addition, to be fully vested in your employer’s contributions to the account—meaning you will own all funds and won’t have to forfeit any of your employer’s contributions if you part ways with your employer—you may have to wait a set period.  

Roth : Contributions are made with post-tax dollars, which means you will pay taxes on this income during the year it’s earned. You will not have to pay any taxes on withdrawals during retirement. (However, you may have to pay taxes on what your employer has contributed because those funds are deposited into a traditional account, not a Roth.) Roth 401(k) plans may also mandate a set timeframe to be fully vested.

Safe Harbor : This plan works like a traditional 401(k) plan, but you are fully vested for all employer contributions when they are made. That means you won’t forfeit any funds if you change your employer. 

SIMPLE : Only for employers with 100 or fewer employees who make at least $5,000 per year, the SIMPLE 401(k) works like a safe harbor 401(k) in that the employee is fully vested in all employer contributions at the time they are made.

Eligibility Requirements

Typically, all employees who are 21 or older and have worked for the company for at least one year are eligible for a 401(k) plan. However, employers can offer a 401(k) earlier than one year. 

Contribution Limits

The Internal Revenue Service sets contribution limits for all 401(k) plans each year. For 2024, that limit is $23,000 for all but SIMPLE 401(k) plans. Employees age 50 and older can contribute an additional catch-up contribution of $7,500 in 2024, for a total maximum contribution of $30,500 in all but SIMPLE 401(k) plans.

For SIMPLE 401(k) plans, the maximum contribution for 2024 is $16,000, with a maximum catch-up contribution of $3,500 for employees age 50 and older.

Step 2: Enroll in Your Employer’s 401(k) Plan

There are two ways to enroll in your employer’s 401(k) plan. The first is to enroll yourself. Your human resources manager should have the necessary paperwork for you to complete and submit to start your 401(k) plan participation. The second is your employer may automatically enroll you in the 401(k) plan by having you complete the paperwork during your onboarding process. 

Starting with 401(k) plans opened in 2025, your employer is required under the SECURE 2.0 Act to automatically enroll you in the company’s 401(k) plan unless you opt out. Employers with SIMPLE 401(k) plans, with no more than ten employees, or who have been in business less than three years are exempt from this mandate.

Step 3: Choose Your Contribution Amount

If you want to maximize your 401(k) contribution, you can determine how much of your salary is required to meet the current Internal Revenue Service (IRS) limit. For example, for 2024, you can contribute up to $23,000. If it’s not feasible to contribute the percentage of your salary to reach $23,000, choose a percentage you can afford.

If you have a choice between a traditional 401(k) and a Roth 401(k), consider the tax implications when deciding how much to contribute. Contributing to a traditional plan reduces your taxable income for the year. You won’t pay taxes on that money until you withdraw it. If you contribute to a Roth, on the other hand, you will pay taxes on that money before it’s contributed. So the key is deciding when you can afford to pay taxes: now or later, when you could be in a higher (or lower) tax bracket .  

Contribute the amount necessary to get the company to match. So, if your company matches 4% of your salary, set your contributions to 4% or higher.

Step 4: Take Advantage of Employer Matching

Employers have the option of contributing to your 401(k) plan. They may make a set contribution to every employee’s 401(k) plan, match what the employee contributes, or both. Regardless of your employer's option, this is free money you receive in your 401(k).

Employer matches are typically between 3% and 6% of your salary. The exact amount varies from employer to employer, so find out from your human resources manager what the employer match is at your company. 

If your employer matches your 401(k) contributions, take steps to maximize these contributions by doing the following: 

  • Ensure the employer match starts on time . Some employers match as soon as you become eligible for a 401(k) plan, while others require you to work for the company for a specific period before contributing. For instance, if your employer doesn’t start matching until you’ve been there for a year, ensure those employer matches start when you become eligible. 
  • Stay with your employer until you are fully vested in your 401(k) . Some companies set up a vesting schedule, meaning you must remain with the company for a set period to take ownership of all contributions–yours and your employer’s–in your 401(k) plan. If you leave before you are fully vested, you can only take the contributions you made to the account. 

Teresa Ghilarducci, a labor economist and professor at the New School for Social Research, has warned that the 401(k) program is insufficient for preparing for U.S. citizens’ old age and proposed a new type of national pension to replace it.

Step 5: Select Your Investment Options

With 401(k) plans, your employer usually provides a list of investment options you can choose for your plan. But it’s up to you to decide which best serves your financial goals. Typical investment options include mutual funds comprising stocks, bonds, and cash. 

A common mutual fund option is a target-date fund . These funds include a mix of investments adjusted as you approach your target retirement date. Essentially, the initial investments may be more high risk at the start of the fund, but will flip to low-risk investments as your retirement date inches closer.

Other popular choices include bond funds and index funds . Bond funds provide a share of interest, capital gains , and dividends as the bond matures. Index funds follow the trends of a specific stock market , such as the S&P 500 .

Each type of investment has its own level of risks and rewards, so it’s important to review the prospectus for each to see how it performs before making a decision. 

Remember, too, that each type of investment includes management fees , so research those to determine which investment is affordable and aimed at helping you reach your financial goals.  

Step 6: Monitor and Adjust Your 401(k) Plan

Setting up and contributing to your 401(k) plan is just the start of planning for your retirement. You need to keep tabs on your 401(k) to ensure it’s working for you. Here are some tips on monitoring investment performance and making necessary changes to your 401(k) plan. 

  • Keep an eye on your 401(k)'s performance . Review how your 401(k) plan is performing each year, and make any necessary adjustments to ensure you meet your financial goals.
  • Adjust your 401(k) contribution each year to maximize savings . For instance, if you get a raise, take advantage of these extra earnings to increase your 401(k) contribution. This is especially important if you have yet to reach your employer’s maximum match contribution. 
  • Review management fees each year . Management fees could increase when you have your 401(k), so check those at least once a year to ensure they remain affordable. If not, you may need to change how your contributions are invested. 

Is It Free to Start a 401(k)?

While your employer typically pays the plan administration costs for your 401(k), you must pay fees on your chosen investments. These vary, and are usually a fraction of a percentage or a few percents of your investment total, so reviewing all fees before moving forward is important. 

Can I Set Up a 401(k) for Myself Without an Employer?

To set up a 401(k) for yourself, you must have an employer or be self-employed. This is called a solo 401(k) .

How Much Should I Start Putting in My 401(k)?

This depends on your personal financial situation, but if you can contribute enough to get your employer a match, that’s a good place to start.

What Are the Benefits of a 401(k) Compared to Other Retirement Options?

Two key benefits of a 401(k) that you don’t get with other retirement options include a higher contribution limit (i.e, $23,000 for a 401(k) versus $7,000 for an IRA ) and a potential employer match. 

What Is the Average Rate of Return on a 401(k)?

The average rate of return on a 401(k) depends on the amount you contribute, the investments you choose, and the fees you pay. 

The Bottom Line

A 401(k) plan is an employer-sponsored retirement plan that provides a good way to save for retirement. Contributions can be made via payroll deduction and, depending on the type of plan, could provide tax savings. Taking advantage of an employer match for contributions could help you save even more money toward retirement. But it’s important to review and choose investments wisely to maximize your savings. And, of course, the sooner you set up your 401(k), the more time you have to build up your savings. Therefore, if you haven’t already, talk with your human resources manager to set up your 401(k) plan.  

IRS. " 401(K) Plan Withdrawals ."

IRS. " Roth Comparison Chart ."

IRS. " IRC 401(k) Plans – Establishing a 401(k) Plan ."

IRS. " Operating a 401(k) Plan ."

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

IRS. " Retirement Topics: 401(k) and Profit-Sharing Plan Contribution Limits. "

Fidelity. " SECURE 2.0: Rethinking Retirement Savings ."

FINRA. " Retirement Accounts ."

Fisher Investments. " 401(k) Employer Match Contributions Matter ."

IRS. " Retirement Topics – Vesting. "

The New School Schwartz Center for Economic Policy Analysis. " Are U.S. Workers Ready for Retirement? Trends in Plan Sponsorship, Participation, and Preparedness. "

FINRA. " Save the Date: Target-Date Funds Explained ."

FINRA. " Mutual Funds ."

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How to Write a Business Plan: Your Step-by-Step Guide

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So, you’ve got an idea and you want to start a business —great! Before you do anything else, like seek funding or build out a team, you'll need to know how to write a business plan. This plan will serve as the foundation of your company while also giving investors and future employees a clear idea of your purpose.

Below, Lauren Cobello, Founder and CEO of Leverage with Media PR , gives her best advice on how to make a business plan for your company.

Build your dream business with the help of a high-paying job—browse open jobs on The Muse »

What is a business plan, and when do you need one?

According to Cobello, a business plan is a document that contains the mission of the business and a brief overview of it, as well as the objectives, strategies, and financial plans of the founder. A business plan comes into play very early on in the process of starting a company—more or less before you do anything else.

“You should start a company with a business plan in mind—especially if you plan to get funding for the company,” Cobello says. “You’re going to need it.”

Whether that funding comes from a loan, an investor, or crowdsourcing, a business plan is imperative to secure the capital, says the U.S. Small Business Administration . Anyone who’s considering giving you money is going to want to review your business plan before doing so. That means before you head into any meeting, make sure you have physical copies of your business plan to share.

Different types of business plans

The four main types of business plans are:

Startup Business Plans

Internal business plans, strategic business plans, one-page business plans.

Let's break down each one:

If you're wondering how to write a business plan for a startup, Cobello has advice for you. Startup business plans are the most common type, she says, and they are a critical tool for new business ventures that want funding. A startup is defined as a company that’s in its first stages of operations, founded by an entrepreneur who has a product or service idea.

Most startups begin with very little money, so they need a strong business plan to convince family, friends, banks, and/or venture capitalists to invest in the new company.

Internal business plans “are for internal use only,” says Cobello. This kind of document is not public-facing, only company-facing, and it contains an outline of the company’s business strategy, financial goals and budgets, and performance data.

Internal business plans aren’t used to secure funding, but rather to set goals and get everyone working there tracking towards them.

As the name implies, strategic business plans are geared more towards strategy and they include an assessment of the current business landscape, notes Jérôme Côté, a Business Advisor at BDC Advisory Services .

Unlike a traditional business plan, Cobello adds, strategic plans include a SWOT analysis (which stands for strengths, weaknesses, opportunities, and threats) and an in-depth action plan for the next six to 12 months. Strategic plans are action-based and take into account the state of the company and the industry in which it exists.

Although a typical business plan falls between 15 to 30 pages, some companies opt for the much shorter One-Page Business Plan. A one-page business plan is a simplified version of the larger business plan, and it focuses on the problem your product or service is solving, the solution (your product), and your business model (how you’ll make money).

A one-page plan is hyper-direct and easy to read, making it an effective tool for businesses of all sizes, at any stage.

How to create a business plan in 7 steps

Every business plan is different, and the steps you take to complete yours will depend on what type and format you choose. That said, if you need a place to start and appreciate a roadmap, here’s what Cobello recommends:

1. Conduct your research

Before writing your business plan, you’ll want to do a thorough investigation of what’s out there. Who will be the competitors for your product or service? Who is included in the target market? What industry trends are you capitalizing on, or rebuking? You want to figure out where you sit in the market and what your company’s value propositions are. What makes you different—and better?

2. Define your purpose for the business plan

The purpose of your business plan will determine which kind of plan you choose to create. Are you trying to drum up funding, or get the company employees focused on specific goals? (For the former, you’d want a startup business plan, while an internal plan would satisfy the latter.) Also, consider your audience. An investment firm that sees hundreds of potential business plans a day may prefer to see a one-pager upfront and, if they’re interested, a longer plan later.

3. Write your company description

Every business plan needs a company description—aka a summary of the company’s purpose, what they do/offer, and what makes it unique. Company descriptions should be clear and concise, avoiding the use of jargon, Cobello says. Ideally, descriptions should be a few paragraphs at most.

4. Explain and show how the company will make money

A business plan should be centered around the company’s goals, and it should clearly explain how the company will generate revenue. To do this, Cobello recommends using actual numbers and details, as opposed to just projections.

For instance, if the company is already making money, show how much and at what cost (e.g. what was the net profit). If it hasn’t generated revenue yet, outline the plan for how it will—including what the product/service will cost to produce and how much it will cost the consumer.

5. Outline your marketing strategy

How will you promote the business? Through what channels will you be promoting it? How are you going to reach and appeal to your target market? The more specific and thorough you can be with your plans here, the better, Cobello says.

6. Explain how you’ll spend your funding

What will you do with the money you raise? What are the first steps you plan to take? As a founder, you want to instill confidence in your investors and show them that the instant you receive their money, you’ll be taking smart actions that grow the company.

7. Include supporting documents

Creating a business plan is in some ways akin to building a legal case, but for your business. “You want to tell a story, and to be as thorough as possible, while keeping your plan succinct, clear, interesting, and visually appealing,” Cobello says. “Supporting documents could include financial projects, a competitive analysis of the market you’re entering into, and even any licenses, patents, or permits you’ve secured.”

A business plan is an individualized document—it’s ultimately up to you what information to include and what story you tell. But above all, Cobello says, your business plan should have a clear focus and goal in mind, because everything else will build off this cornerstone.

“Many people don’t realize how important business plans are for the health of their company,” she says. “Set aside time to make this a priority for your business, and make sure to keep it updated as you grow.”

how to start a pension plan for a small business

What is an IRA account?

Types of ira accounts.

  • Benefits of IRAs
  • IRA Contribution limits 2024

Choosing the right IRA

Withdrawals and distribution, ira accounts: types, benefits, and how to choose the right one.

Paid non-client promotion: Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate investing products to write unbiased product reviews.

  • An Individual Retirement Arrangement (IRA) is a type of retirement account for individuals that provides various tax advantages.
  • Depending on which type of IRA you have, you contribute either pre- or post-tax dollars and invest the funds.
  • IRAs come with more investment flexibility than 401(k)s, which are employer-sponsored plans.

IRAs are some of the best retirement plans for growing your nest egg through compound interest and investment opportunities. An IRA is just one of many retirement account options, and there are several types to choose from. The right choice will depend on your retirement goals, timeline, and expectations for future taxes. 

Here's everything you need to know about opening an IRA, contribution limits, tax advantages, and the best IRA investment strategies in 2024. 

Definition and purpose of an IRA

Individual Retirement Arrangements (IRAs) are retirement accounts for individuals to save pre- or after-tax dollars toward their post-working years. Like a 401(k), IRAs have compounding power that can help them grow significantly over time. 

"IRAs are simple and are an extremely easy investment plan to help save for your retirement years," says Wilson Coffman, CFA, the president at Coffman Retirement Group .

IRAs have many tax benefits and can allow you to invest funds in various assets. However, there are age limits on when you can withdraw funds (or face a penalty), and in many cases, the contribution maximums may be lower than on other retirement accounts. For example, 401(k)s allow you to contribute up to $23,000 annually.

You can't start withdrawing from your IRA until you are at least 59 1/2, or the IRS will charge you a 10% penalty fee. The purpose of this penalty is to discourage the misuse of funds and promote long-term growth for future retirees.

This rule has some expectations, as you won't be charged the 10% fee if you meet IRS hardship guidelines for a qualified, penalty-free withdrawal .

Opening and funding an IRA account

To open an IRA, you go through a brokerage or local back. "IRAs are extremely easy to establish and set up," Coffman says. "Most banks offer an IRA, and any broker will offer IRA accounts. There are also many investment firms, like Fidelity , that can offer investment platforms for online retirement savings accounts as well."  

Once set up, you'll fund the account using bank payments, checks, or an IRA rollover if you have a different retirement account or old 401(k). The best rollover IRAs offer direct rollovers or trustee-to-trustee transfer by contacting your existing plan's administrator.

You can also take a distribution and deposit it in your new IRA within 60 days.

Traditional IRA

This type of IRA is funded with pre-tax earnings. Contributions are tax-deductible; you'll pay taxes on the funds when you withdraw them in retirement. They're typically best if you expect your retirement tax bracket to be lower.

With Roth IRAs, you fund the account with after-tax earnings. This allows the money to grow tax-free, and you'll pay no additional taxes upon withdrawal. They're a good option if you predict your retirement tax bracket will be higher.

Original Roth IRA contributions (not the growth) can be withdrawn penalty-free at any point before you're 59 1/2, essentially acting as an emergency fund. That said, you'll get the most out of your Roth IRA by leaving the funds alone for as long as possible and contributing regularly. 

SEP IRAs are for employees of self-employed professionals or small businesses who are at least 21 years old and have worked for the employer for at least three of the last five years. They have much higher contribution limits than traditional and Roth IRAs and are taxed upon withdrawal.

All contributions from the employer to the SEP-IRA are 100% vested immediately. 

SIMPLE IRAs are another type of small business retirement account for self-employed individuals or businesses with 100 employees or less. Qualifying employees must also have made at least $5,000 in the last two years and expect the same amount in the current year.

Employers must match employee contributions dollar for dollar up to 3% of the employee's salary. Employee contributions are 100% vested immediately. 

Benefits of IRA accounts

Tax advantages.

One of the biggest benefits of contributing to an IRA is the tax advantages. Since IRAs can be funded with either pre-tax (traditional IRA) or after-tax (Roth IRA), you can receive one of two tax benefits: tax-deferred growth or tax-free withdrawals.

You deduct your contributions from your current taxes by funding your account with pre-tax dollars. During retirement, you'll only pay tax on the amount withdrawn, including the growth. This is especially beneficial if you predict you'll be in a lower tax bracket during retirement and, therefore, pay a lower tax rate on your contributions. 

After-tax contributions mean you pay tax now to receive tax-free growth and withdrawals later. You won't have to worry about moving to a state with a higher tax rate or diminishing potential gains. This tax advantage is best for individuals who predict their tax bracket will be higher during retirement. 

Potential for growth and compound interest

In addition to tax advantages, IRAs are known for their powerful wealth-building capabilities. Money in your IRA can be invested in securities like stocks, bonds, ETFs, and mutual funds. IRAs also grow with the magic of compounding.

With compound interest , the interest earned each period (month, year, etc.) gets added to your principal amount. This means the next time interest is calculated, it's applied to a larger amount, leading to faster growth over time. The longer your money is allowed to compound, the greater the growth potential. 

IRA Contribution limits for 2024

The IRS has set contribution limits on IRAs, but the exact amount depends on your age, your taxable compensation for the year, and the type of IRA you've established.

Annual contribution limits

Here's how IRA contributions break down for 2024:

Traditional and Roth IRAs<
SIMPLE IRAs
SEP IRAs

Income limits and eligibility for a Roth IRA 2024

Married filing jointly or qualifying widow(er)Less than $230,000Up to the limit
A reduced amount
Zero
Married filing separately and you lived with your spouse at any time during the yearLess than $10,000A reduced amount
Zero
Single, head of household, or married filing separately and you did not live with your spouse at any time during the yearLess than $146,000Up to the limit
A reduced amount
Zero

Factors to consider

Some factors to consider when choosing the right IRA include: 

  • Investment strategy: Consider the investment strategy you prefer to grow your nest egg. Generally, the best IRA investment strategy for long-term wealth building is a buy-and-hold strategy, which mitigates risk and volatility while utilizing compound interest. However, some pre-retirees (particularly younger traders) may prefer an active, riskier strategy with the potential for higher gains. 
  • Investment options: What kinds of investable securities do you want to buy and sell in your IRA? IRA companies offer a wide range of investment options, including stocks, bonds, ETFs, and mutual funds. Some providers offer alternative investment options like real-estate, art, and cryptocurrencies. 
  • Fees and expenses: Ensure you understand all the fees associated with the IRA provider you sign up with. This includes account fees, annual fees, management fees, transaction fees, and expense ratios. Fees can diminish potential returns over time, so it's important to compare fees between different providers.
  • Investment tools and research: Consider the kinds of investment tools, services, and research that can help you make smart investment decisions. These could include educational resources, portfolio analysis tools, tax-loss harvesting, and market research reports.
  • Minimum investment requirement: Some online brokerages and apps require a minimum investment to open an IRA and start investing. There are many low-cost IRAs with no minimums and other more robust IRA providers with minimums ranging from $5 to $100. Before signing up, know how much you need to invest to get started.
  • IRA match: Some IRA providers now offer an IRA match, similar to a 401(k) employer match. When you contribute to your retirement account, your IRA may contribute a matching contribution up to a certain percentage. However, only a handful of investment platforms offer this perk. 

Comparing traditional and Roth IRAs

The most common types of IRAs are traditional and Roth. They act very similarly, providing the same investment options and contribution limits. Most IRA providers typically offer both kinds to anyone with earned income.

Pre-tax dollars fund traditional IRAs, so you only have to pay income tax on the amount withdrawn during retirement. Whereas after-tax dollars fund Roth IRAs. That means you pay tax now for tax-free growth and withdrawals later on. 

Most people choose between traditional and Roth IRAs. According to Clark Howard, author and host of The Clark Howard Podcast , future taxes should play a big role in this decision.

"The biggest difference between a traditional IRA and a Roth IRA is the treatment of taxes," Howard says. "ln general, tax rates are likely to go up over the years no matter which political party is in power. That means it may make more sense to skip the tax deduction you get up front with a traditional IRA to avoid tax later by investing with a Roth IRA."

Our traditional IRA vs. Roth IRA comparison guide examines fees, investment strategies, tax advantages, and more to provide a closer IRA comparison. It's common for people to have both types of IRAs for double the tax benefits. 

However, a SEP or SIMPLE IRA may be a better option for small businesses or self-employed people. 

You'll want to wait until at least 59 ½ to withdraw funds on all IRA types. Withdrawals before this point face a 10% penalty, one of the most significant IRA withdrawal rules and penalties. There are some exceptions on Roth IRAs if you've funded it with a rollover, so talk to your tax advisor if you plan to withdraw early from this type of account.

The tax treatment of an IRA depends on the type of account. With traditional, SIMPLE, and SEP IRAs, contributions are tax-deductible, and you fund the account with pre-tax dollars. With Roth IRAs, you contribute post-tax dollars — or money you've already paid income taxes on. This allows for tax-free withdrawals in retirement.

"IRAs are either taxed at the beginning or the end," says Christy Matzen, CFP, senior manager and global planning for Northstar . "When you make a contribution, you can pay tax on the dollars before you put it into the account — this will let you take the money out tax-free, or you can take a tax deduction when you make the contribution, but then the money will be taxed when you take it out."

Required minimum distributions (RMDs)

Your Required Minimum Distribution (RMD) is the minimum amount you must start withdrawing from your IRA based on your birthdate. Generally, you must start withdrawing from your IRA by April 1 of the following year when you turn 72. If your birthdate is after December 31, 2022, then your RMD is age 73. 

After the first required year, you must continue making subsequent annual withdraws by December 31. How much you withdraw depends on the total value of your account and life expectancy. 

IRA account FAQs

The difference between traditional and Roth IRAs is that a traditional IRA is funded by pre-tax dollars, and a Roth IRA is funded by after-tax dollars. With a traditional IRA, you only pay tax on the amount withdrawn during retirement, which is especially helpful if you are in a lower tax bracket. On the other hand, Roth IRAs grow tax-free and have tax-free withdrawals, which is great if you expect your income to be higher in your post-working years. 

You can contribute up to $7,000 to a traditional or Roth IRA in 2024. Individuals age 50 or older can contribute up to $8,000. You can contribute up to $16,000 (or $19,500 if you're 50 or older) to a SEP IRA. For SIMPLE IRAs, you can contribute $69,000 or 25% of your compensation, whichever is less.

Anyone with earned income is eligible to open an IRA. However, you can only open one of each type. There are no age restrictions on IRAs either. For Roth IRAs, your modified adjusted gross income (MAGI) must be less than $161,00 for single filers to qualify (less than $240,000 for married couples filing jointly). 

You can start withdrawals from your IRA without penalties at age 59 1/2. There are exceptions to this rule, however, as certain hardship guidelines allow penalty-free early withdrawals. For example, the loss of a job or permanent disability may allow you to withdraw early from your IRA without incurring the 10% penalty fee. 

Required Minimum Distributions (RMDs) are the mandatory withdrawals you must start taking from your IRA during retirement. You must start taking RMDs by April 1 of the year following your 72 birthdate (73 if your birthdate is after December 31, 2022). 

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Home >> #realtalk Blog >> Manage a business >> Your go-to checklist…

Your go-to checklist for starting a small business (+ free download!)

By Homebase Team

Person writing on a notebook beside Macbook

Maybe it all started with your EZ bake oven marketing plan, and it’s been your long-time dream to start a business. Or maybe you’ve recently developed your top-tier welding skills, and you want to monetize your trade. 

The trouble with starting any small business is knowing where to start! Luckily for you, you’ve come to the right place. If you’re getting the yips just thinking about what it takes to start a small business, we’ll walk you through the steps involved, including actionable advice along the way. And to help you even more, we’ve created a handy checklist for starting a small business so you can get started on the doing instead of stuck in the thinking.

What is a small business?

There’s no one definition for a small business. It can be just you in your backyard or an enterprise with a fulfillment team in a warehouse, and everything in between. Typically when we talk about small businesses, we’re referring to those with fewer employees and lower annual revenue. Think more along the lines of a local restaurant or a boutique hair salon versus a big-box department store. The U.S. Small Business Administration (SBA) does give more specific standards for small businesses in specific industries based on annual revenue and the number of employees . Officially, if you’re under 500 employees, you qualify as a small business.

But it’s not just revenue and size that separates small businesses from the crowd. Small businesses generally aim to break even or make money as soon as possible. With few (or no) investment dollars, your livelihood is on the line! 

A small business is different than a startup, though a startup can also be a small business. While startups prioritize industry disruption and profitability down the line, a small business might have humbler motivations, like opening a single storefront or pursuing a passion project.

What to expect when starting a small business.

If you’re starting a small business, you’re about to embark on the ride of a lifetime. I f there’s anything you should expect when starting a small business , it’s to expect the unexpected. No matter how organized and prepared you are, there’s almost guaranteed to be something that comes out of the blue. But it’s all part of the fun right? 

That’s why putting a solid plan in place is so important. When you plan for speedbumps and have contingencies in place, you can set yourself up for success—and hopefully experience more ups than downs to opening day and beyond.

Steps to start a small business.

Getting a small business off the ground is no easy feat. Here are a few basic tips to get you started. Don’t forget to scroll down and download our checklist for starting a small business to get you oriented!

1. Come up with a business idea.

Every business starts with an idea. And really, all you need is that one spark to kick off your small business adventure.

You might already have a business idea. But if you’re still on the search, here are some tips to help you come up with the perfect business idea:

  • Ask friends and family around you what they think you’re great at.
  • Dig into your own needs and interests.
  • Take advantage of something you’re good at.

Remember: your business idea doesn’t have to be groundbreaking. You can own a very successful small business without having to go too far outside the box. Just make sure you’re meeting a market need!

Which brings us to…

2. Do market research.

Now that you have your business-worthy idea, it’s time to do some research. 

The goal of market research is to double-check that your business is actually a good idea. Some questions you’ll want to answer when doing market research include:

  • Is there a market for your business? Are there people willing to pay you for your products or services?
  • What is your competition? How will you stand out from the crowd?
  • Based on the current and projected market conditions, can you be confident that your business will be profitable ?

3. Write a business plan.

A business plan is basically the blueprint for your business. It covers all the key information you need to get your business up and running.

While drafting up a business plan can feel time-consuming and a little overwhelming, we promise it’s a step that is definitely worth taking. 

If you need some help getting started, we’ve got just the business plan template for that!

4. Secure your funding.

Usually, you’ll need a small sum of money to get your business off the ground. The amount you need will vary depending on the type of business you’re starting. For example, opening a brick-and-mortar business will likely require a bit more than a digital-first business since you’ll need to secure a physical location. 

You might have saved up some funds, but if you don’t have a full bank account, don’t worry. It’s not the only way to fund your new business venture. You can reach out to family or friends and even secure loans or grants to help you navigate the money side of starting your business. 

The U.S. SBA  has some resources available, and there might be similar programs at a state or local level as well.

5. Pick a business location.

Now that you have a budget and funding, you’ll need to decide where to open your business . Even if you aren’t necessarily going to open a physical location, you still need to have a primary place of business. 

Your business location doesn’t just determine where you’ll open your business. It also impacts the rules and regulations for operating your business , such as employee leave requirements and licensing. We’ll cover these aspects in more detail below.

6. Choose a business structure.

How will you register your business with the state? There are many ways to structure the ownership of your small business. The three most common are:

  • Sole proprietorship. This type of business is the easiest to set up. Under this structure, you own your business, and you generally don’t have to separate your personal and business assets or expenses. 
  • Partnership. This type of ownership is similar to a sole proprietorship, except you’ll own the business in partnership with one or several individuals. You’ll typically pen an agreement that outlines the terms of the partnership to make sure all your interests are protected.
  • Limited liability companies (LLC). More similar to a corporation, an LLC allows you to separate your business from you personally. This can impact everything from taxes to your personal liability for business debts and legal claims. Though it helps protect you as a business owner, LLCs typically require more paperwork and can be more expensive to set up.

If you’re not sure what the best structure is for your small business, a legal and tax advisor can be worth the investment to help you navigate the different options.

7. Choose a business name.

Finding the perfect business name can take a bit of trial and error. Not only do you need a name you and your customers love, but it needs to be available for use. 

Once you’ve checked with business registration services, it’s a good idea to make sure the website domain name, social media handle, and trademarks are also available before you finalize your name. Otherwise, you might find yourself facing a pretty costly rebrand in the future. 

8. Register your business.

Once you have a name and have decided on your business structure, it’s time to go through the proper registration process. The good news is that according to the SBA, most small businesses only have to register their business name with state and local governments . 

9. Secure federal and state tax IDs.

As an individual, you have a social security number. Businesses have Employer Identification Numbers (EIN)—also known as your state tax ID and federal tax ID.

You’ll need a federal tax ID to pay your taxes and before you can open a bank account or hire any employees . It’s free to register for an EIN and you can get your number through the IRS right after you register your business. 

Every state also has different uses for state tax IDs, so it’s worth checking your local state’s website to understand whether or not you need one. 

10. Apply for licenses and permits.

What type of permit or license you need will depend on your business activity and often depends on the state your business is located. For example, in New York you need a lottery agent license to sell lottery tickets. Or in California, you need a license from the California Board of Barbering and Cosmetology to offer services in the beauty industry.  The SBA provides a list of federally regulated industries and ones that you might want to double check with your local Secretary of State’s website.

11. Open a business bank account.

Managing money can be a bit of a headache in the best of circumstances. Add a business in there and you’re well on your way to a full-on migraine.

You can make the money management side of owning a business a bit easier by separating out your business expenses and income from your personal. In fact, depending on your business structure, you might be required to have a separate business bank account.

Tip: Don’t forget to connect it to your payment and payroll software.

12. Decide what payment methods to accept.

Once opening day comes around, it’s time to start selling, which means you have to have a solution to collect payment. There are many popular payment platforms that you can use to collect payment. 

You’ll also want to consider if you’re accepting all types of payment. Cash is often the most cost-effective payment method. However, offering credit card and debit payments will likely make it easier for customers to pay and visit your small business. 

13. Set up invoicing and accounting software.

You’ll also need a solution for keeping track of that money. Generally, you should be providing customers with receipts and tracking incoming and outgoing payments. Even before your business opens, you’ll likely be spending some money.

Having solid invoicing and accounting software can help keep you organized and profitable, and save you some stress when tax season rolls around. 

14. Establish your record-keeping process.

Record-keeping helps you track business growth and easily access the information you need when you need to file taxes or prepare financial statements. It’s a log of every single transaction that should make it easy for you to look back on and understand your income and outgo.

For the most part, there aren’t any specific rules around how you need to manage your books. The best kind of record-keeping process is the one that you’ll actually stay on top of—and one that lays out what you need to know when you need to know it.

15. Hire employees (if needed).

Not all small businesses start off as a one-person show. For example, if you’re a new small retail shop that’s open 7 days a week, it’s unlikely you’ll be able to manage all the hours yourself.

So if you expect to hire employees , make sure to plan in advance. It can take several weeks from listing your job posting to hiring. You’ll want to be prepared for your business’s grand opening!

16. Set up payroll.

Where there are employees, there’s payroll. A full-service payroll platform can help you calculate employee wages, breaks, overtime, and even taxes based on labor laws at the click of a button.

By setting up the right payroll process from the start, you’ll be able to spend less time paying your employees and more time starting your small business.

Small business owner tip: Don’t forget to think about how you plan to pay yourself as well.

17. Get business insurance.

Just like you, your business also needs insurance. 

Business insurance protects your business from the unexpected, such as theft, fire, or any other unexpected emergency. It also protects your customers. Most business policies also cover liability in case something happens to your customers while engaging with your business. 

Every business will have unique business needs. Make sure to talk to an experienced insurance representative to help you find the best policy for you.

18. Create your employee policies and handbook.

We know what you’re thinking, “ Do I really need an employee handbook for my small business ?” The answer is—you betcha. 

Even if you’ve only got a couple of employees, having clear policies and an employee handbook can help keep everyone on the same page. Plus, it’ll make it easier to onboard new employees as your team grows. 

An employee handbook isn’t technically a legal requirement but there are federal and state laws that require you to keep employees up-to-date on their rights, as well as paid time off (PTO) and sick leave policies.

19. Purchase and license must-have tools. 

As you get closer to opening day, you’ll start purchasing all the tools and equipment you need. A great way to make sure you cover all your bases is by creating an operational plan for your day-to-day .

However, common examples of tools and platforms for small businesses include:

  • Employee time-clocking system
  • Point-of-sale (POS) system
  • Accounting software
  • Team communication app

20. Market your business. 

Last but not least, don’t forget to market your business. While you know you have a great business, your customers might not know it just yet. 

Marketing is key to attracting the right customers and growing your business . You might’ve already outlined some marketing strategies in your business plan, so make sure to execute them as you get close to opening day. 

Your checklist for starting a small business

There’s a lot of ground to cover before you can open a business. The g ood news: we’ve put together this free checklist that’ll help you cover all your bases before opening day. 

Download the free checklist for starting a small business here: Step-by-step checklist for starting a small business PDF

Start a stellar small business with Homebase

Skip the stress of starting your small business with Homebase. Homebase’s HR and team management app is built for small businesses so you can spend less time managing your team and more time growing your business. 

From hiring and onboarding to HR , everything you need to start your small business is waiting for you. Ready to level up your business? Get started with Homebase for free today. 

Get your team in sync with our easy-to-use, all-in-one employee app.

Starting a small business: FAQs

What should be included in a checklist for starting a business.

Your checklist for starting a small business should include all the tasks you need to get your business off the ground. This includes early-stage basics such as creating a business plan and market research. It also includes legal and financial to-do’s, such as business registration and setting up payroll.

There are a lot of things to consider when starting a small business, when in doubt, use a free checklist for starting a small business—like the one above—so you don’t miss a thing.

How much money should I have saved to start a small business?

How much money you should have saved to start a small business can vary from a few hundred dollars to as much as over $10,000. It all depends on the type of business you’re starting, your location, and the supplies and equipment you need to get started

What are the four things you must do before starting a business?

The four things you need to do before starting a business include:

  • Do research on your target market, business regulations, and legal requirements.
  • Create a business plan to set yourself up for success.
  • Secure funding for your business and get your finances in order.
  • Market your business to attract the right customers.

Bonus number five? Download the free checklist for starting a small business.

How long does it take to start a small business?

Like many other questions related to starting a small business, the answer is, it depends! But a general rule of thumb is that it can take a year or more from idea to opening day. While that may feel like a long time, it’ll help you make sure you get everything done on your small business starting checklist.

Remember:  This is not legal advice. If you have questions about your particular situation, please consult a lawyer, CPA, or other appropriate professional advisor or agency.

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IMAGES

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  2. 9+ Simplified Employee Pension Plan Templates in PDF

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  3. Small Business Pension Plans: What is the Right Fit for Your Business

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  4. How to plan your pension: a guide for small business owners

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  6. What Is a Pension Plan and How Does It Work?

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  1. Starting a Pension for Business Owners and Company Directors

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  5. Business Plans Services| BizCentral USA

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COMMENTS

  1. A Guide to Small Business Retirement Plans

    With this type of small business retirement plan, you make contributions as the employer and the employee. As the employee, you can contribute up to $20,000 for 2022, or up to $22,500 if you're 50 or older. Limits on catch-up contributions for 2022 are $6,500 and $7,500 for 2023. As the employer, you can contribute up to 25% of compensation ...

  2. 401k Plans for Small Businesses

    Who is eligible: Businesses with 2-1,000 employees looking to start a 401(k) for the first time. Tax benefits: For employers: Tax-deductible employer contributions. Plus, when starting a new 401(k), businesses may be eligible for tax credits. 1 For employees: Tax-deferred growth potential and pre-tax contributions to the plan. Who contributes

  3. Small business retirement plans

    You can open a SEP-IRA at Vanguard if there is only one person. Give us a call so we can help you get started with your plan. 855-490-4668. Open a Vanguard SEP-IRA. Other plan types for small business owners can be opened directly through Ascensus. Visit their website to learn more.

  4. Retirement plans for small entities and self-employed

    Get relief for certain withdrawals, distributions, and loans from retirement plans and IRAs if you're affected by the coronavirus. Information on retirement plans for small businesses and the self-employed. Choose a Plan. Maintain a Plan. Find or Fix Plan Errors.

  5. Choosing a Retirement Solution for Your Small Business

    See the IRS's website. (link is external) for annual updates. $6,500 for 2023 and $7,000 for 2024. Participants age 50 or over can make additional contributions up to $1,000. Up to 25% of compensation(1) but no more than $66,000 for 2023 and $69,000 for 2024. Employee: $15,500 in 2023 and $16,000 in 2024.

  6. How To Set Up A Pension Plan For A Small Business

    Talk to your accountant or a tax specialist to discuss your options for saving on taxes by offering a small business pension plan. Pros and cons of a small business pension plan. Pros. The nice thing about a pension plan is that it gives employees some type of financial support after they are retired. From the employer's perspective, offering ...

  7. Small-business retirement plans

    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.

  8. 401(k) for Small Businesses

    Looking to start a 401(k) for your small business? Discover Fidelity Advantage 401(k)℠ - an affordable, simple plan that's easy to manage. ... built for your small business. An affordable, simple plan backed by the power of Fidelity. Leave your 401(k) to the experts so you can stay focused on what you do best—running your business ...

  9. Small Business Retirement Plan Options

    DOL has a toll-free Publication Hotline (1-866-444-3272) to distribute publications geared to educating participants and employers about saving and protecting their benefits. The Saving Matters initiative, part of the U.S. Department of Labor's Retirement Savings Education Campaign, provides resources for employers and workers on retirement saving.

  10. Starting a Business in Retirement

    Create a retirement income plan with the Retirement Planning Tools. For more detailed information, call a Fidelity Retirement Representative at 800-544-5373, Mon.-Fri. 8 am-8 pm ET, Saturday 8 am-8 pm ET, Remember that in addition to a small business retirement plan, you can fully fund an IRA and make catch up contributions if you are age 50 or ...

  11. How to Choose the Best Retirement Plan for Your SMB

    Basic match where employee matches 100 percent of the first 3 percent of deferred compensation and a 50 percent match on the next 2 percent. Enhanced match is when the company matches or exceeds ...

  12. Setting up a 401(k) Plan for Small Businesses

    Your business might be eligible to take advantage of retirement plan tax credits of up to $5,000 a year over three years and an auto-enrollment credit of $500 a year over three years, for a total tax credit of up to $16,500, if you start a new plan. Under SECURE Act 2.0, the employer contribution credit is available for eligible businesses. The ...

  13. A 401(k) Plan for the Small Business Owner

    Key Takeaways. A solo 401 (k) plan is for businesses whose only eligible participants in the plan are its owners (and their spouses, if they work for the business). These plans are often less ...

  14. How Do I Set up a 401(k) for My Small Business?

    Mutual funds are typical investment options through a 401 (k). 5. Document your official 401 (k) plan. Once you've decided which plan (s) you want to offer and the features of each plan, the IRS says you need a written plan document "that serves as the foundation for day-to-day plan operations.".

  15. 3 small business retirement plans

    3 retirement plan solutions for small businesses—from start-ups to $10M AUM. Employee turnover increased for the nation's small businesses due to COVID-19. A recent survey by Principal ® of more than 1,000 small business owners revealed a 20% uptick over the past 12 months, reaching its highest level in years. Recruiting and retaining ...

  16. Setting Up A 401k

    Draft a 401k policy document. Plan documents typically outline the type of 401k chosen - traditional, Safe Harbor or automatic - and key details, such as employee eligibility, contribution levels, etc. The process by which contributions are deposited into the plan and other essential functions may also need to be documented, per legal ...

  17. How to Pick the Best Small Business 401(k) Plan Provider

    Charles Schwab. Charles Schwab provides 401 (k) plans for companies of any size and creates customized plans to fit a business' specific needs. Employee Fiduciary. With 401 (k) plan ...

  18. Publication 560 (2023), Retirement Plans for Small Business

    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.

  19. How to Set Up a Pension Plan for a Small Business

    Note that with this type of small business retirement plan, you are expected to make contributions as the employer and the employee. As the employee, you can contribute up to $19,000 for 2023 or up to $25,000 if you're 50 or older. As the employer, you can contribute up to 25 percent of compensation, unless you're self-employed.

  20. How You Can Use Retirement Funds To Start A Business

    3. The entrepreneur rolls over or transfer funds from their retirement plan into the new 401 (k) plan. 4. The C Corporation's stock can then be purchased at fair market value. 5. And finally ...

  21. How to Create Your Own Pension Plan

    So talk to a financial professional to ensure your plan makes sense from both a personal and a business perspective. "Successful entrepreneurs who have the right assets, the right cash flow, and ...

  22. How to Set Up a 401(k): A Step-by-Step Guide

    Step 1: Understand the Basics of a 401(k) Plan . All 401(k) plans work essentially the same: You contribute to your plan through payroll deductions. Some employers may use automatic deductions to ...

  23. How SECURE 2.0 employer tax credits benefit small businesses

    Example 1: Company X, a small business with 25 employees, 22 of which are considered NHCEs, established a retirement plan in 2023, incurring $7,000 in start-up costs. The increased startup credit allows Company X to claim 100% of eligible start-up costs, up to $5,000 (20 NHCEs x $250). This credit is available for three years.

  24. Best Retirement Plans 2024: Reviews, Comparisons, & Guides

    Simplified employee pension (SEP) IRAs are retirement vehicles managed by small businesses or self-employed individuals. According to the IRS, employees (including self-employed individuals) are ...

  25. What Is a Pension and How Common Are They?

    Defined-contribution plans such as 401(k)s and 403(b)s form the foundation for many people's retirement. There may be more uncertainty with these plans than with a pension, but that doesn't ...

  26. SEP IRA

    SEP IRA. Simplified Employee Pension Plans (SEP IRAs) help self-employed individuals and small-business owners get access to a tax-deferred benefit when saving for retirement. With Fidelity, you have no account fees and no minimums to open an account. 1 You'll get exceptional service as well as guidance from our team.

  27. Retirement Plans in USA

    SIMPLE IRAs are beneficial for small businesses looking to offer retirement benefits without the complexity of a 401(k) plan. Thrift Savings Plan (TSP) The TSP is a retirement savings plan for federal employees and members of the uniformed services, including the Ready Reserve.

  28. How to Write a Business Plan: Step-by-Step Guide

    "You should start a company with a business plan in mind—especially if you plan to get funding for the company," Cobello says. "You're going to need it." Whether that funding comes from a loan, an investor, or crowdsourcing, a business plan is imperative to secure the capital, says the U.S. Small Business Administration. Anyone who ...

  29. IRA Accounts Explained: Types, Benefits, and Expert Tips for 2024

    However, a SEP or SIMPLE IRA may be a better option for small businesses or self-employed people. Withdrawals and distribution You'll want to wait until at least 59 ½ to withdraw funds on all IRA ...

  30. Your go-to checklist for starting a small business (+ free download

    What to expect when starting a small business. If you're starting a small business, you're about to embark on the ride of a lifetime. I f there's anything you should expect when starting a small business, it's to expect the unexpected. No matter how organized and prepared you are, there's almost guaranteed to be something that comes ...