For a small-business owner, choosing a retirement plan can be more complicated than it appears. While large corporations usually go with a traditional 401(k), small-business owners have more options, including self-directed IRAs, SEP-IRAs and Solo 401(k) plans. And within each type of plan, the features, benefits and restrictions can vary from one plan provider to another.
Choosing the right retirement plan is an essential step for financial security. If you own a business, it’s imperative that you understand how the various plans work and the pros and cons of each. Here are four areas to pay particular attention to when reviewing your options.
You’ll have to decide whether your company’s retirement plan will need to cover employees. For example, Solo 401(k) plans are designed for self-employed individuals, including business owners. However, you can’t have a Solo 401(k) if your business has full-time employees other than you and your spouse.
An IRA plan is a better solution for businesses with full-time employees. You can choose to set up a self-directed IRA, with or without employees participating, or include your employees in an SEP-IRA plan.
Participants in traditional 401(k) plans can typically choose among mutual funds to build their portfolio. What small-business owners may not know is that they could have more investment choices with a self-directed individual retirement plan. Many IRA and Solo 401(k) plans allow you to invest in alternative assets, including real estate, precious metals and more.
However, while the IRS allows such investments, some plan providers may restrict your options. Therefore, study the fine print of any plan you’re considering to understand the features as well as the restrictions.
Some plan providers offer self-directed retirement plans with “checkbook control,” which means you have direct access to your retirement funds to invest as you wish.
Many plan owners use this option to take control of their investment decisions. Others choose checkbook control for its other benefits. With checkbook control, you usually are able to choose which bank to deposit your money in. You’ll also have direct access to the money and can better understand where it’s being invested.
Checkbook control can save plan owners thousands of dollars in management fees. Because you’re making the investment decisions yourself, you can essentially eliminate transaction costs or value-based management fees. That said, this option also requires you to have a certain level of investment know-how. Make sure to educate yourself about different investment options before choosing checkbook control.
Most advisors recommend against borrowing money from retirement savings. For some business owners, however, this option can come in handy in a pinch.
Note that with an IRA, there is no loan option. A Solo 401(k), however, may allow you to borrow up to 50% of the account balance or $50,000, whichever is less. Loan availability varies by plan provider, so make sure you know the details before deciding on a provider.