By Fraser Sherman Updated January 25, 2021
When you run your own business, your retirement plans are entirely in your hands. When you set up as a limited liability company (LLC), there's no employer to restrict your choice of plan – it's all up to you. There's no shortage of LLC retirement plan options. It's merely a matter of weighing the choices and finding the one that works for you.
LLC retirement plan options are the same as for any self-employed individual. They include SEPs, SIMPLE IRAs or a 401(k). As you're both an owner and employee, if you have other employees, you have to give them the option to participate in the same plan.
Limited Liability Companies
As the name suggests, a limited liability company shields your personal assets from business liability the way a corporation does. Bizfilings explains that you can set up an LLC so that it operates as a sole proprietorship or a partnership without the complexity of forming and running a corporation. However, you may have to pay state fees, increasing the cost compared to a sole proprietorship.
Like a partnership or a sole proprietorship, an LLC is a pass-through company. Instead of the business paying taxes, the income passes through to you and your partners, if you have any. You report it as personal income on your income tax forms.
LLC Retirement Plan Options
When you set up an LLC, you become an owner-employee, EisnerAmper points out. You're still considered self-employed, so the retirement plans for LLC owners are the same you could set up if you were a sole proprietor or in a partnership. Things may be slightly more complicated if you have employees.
The IRS lists possible plans for self-employed business owners on its website:
- The Simplified Employee Pension (SEP) allows you to contribute as much as 25 percent of your self-employment earnings to a SEP-IRA. The LLC IRA contribution limit is currently $58,000. Only employers contribute to the plan, not employees.
- You can set up a 401(k) at your job even if you're a one-person company. As you're also the company owner, you can tailor your plan to suit your needs, including an option for hardship distributions in a crisis, for example.
- The SIMPLE IRA – a Savings Incentive Match Plan for Employees – allows you to contribute your net earnings to a maximum of $13,500. On top of the LLC IRA contribution limits, you can include a 2 percent company contribution or 3 percent matching contribution.
- An old-school pension or "defined benefit plan." These guarantee a set amount of money at retirement rather than depending on the market.
The merits of the different retirement plans depend on your individual situation. For example, if you don't see yourself putting more than $10,000 into the account, the lower contribution limits on a SIMPLE IRA won't hurt you. If you anticipate that you could be contributing $40,000 a year within a decade, a SEP's higher limits may benefit you more.
Complications to Watch For
If you have a staff working for you, the situation is more complicated. Owner-employees can't give themselves a retirement plan and not give other employees the same option. Fundera notes that if you give yourself a SEP, every employee has to have the choice to sign up for one. The amounts you contribute can become steep as your business grows and adds staff.
Another factor is that unlike regular employees making contributions out of their salary, your income as a business owner is more unpredictable. If the business runs in the red for the year, you have no earned income to contribute. If you have any doubts about staying in the black, it's safer to wait until the end of the year to make your retirement plan contribution.
FAQs
Solo 401(k) plans are not limited to sole proprietorships. Businesses that are structured as limited liability corporations (LLC), as well as partnerships, may also participate in these plans if they meet all the eligibility requirements.
Can you contribute to an IRA if you have an LLC? ›
So if your LLC profit is $5000 per person and that's your only income, a personal IRA will allow you to contribute up to $5000 but an SEP-IRA would be limited to $1250. If your LLC profit was $50,000 per person, a personal IRA would be limited to $6500 or $7500, but an SEP-IRA would allow up to $12,500.
Can a business write off retirement contributions? ›
Most employers can deduct, subject to limits, contributions they make to a retirement plan, including those made for their own retirement. The contributions (and earnings and gains on them) are generally tax-free until distributed by the plan.
Can an LLC owner contribute to a SIMPLE IRA? ›
When your business is run as a sole proprietorship (or as a single-member LLC that is treated as a proprietorship for federal tax purposes), you're considered self-employed. Therefore, you make the employer matching contribution, as well as the elective deferral contribution, on your behalf.
How much can my LLC contribute to my 401k? ›
Then, as the employer, you can make a contribution of up to 25% of your compensation each year. Total contributions to a participant's account, including catch-up contributions for those age 50 and over, cannot exceed $76,500 for 2024. For those under 50, total contributions cannot exceed $69,000.
Can my LLC contribute to my 401k? ›
If your LLC is a single-member entity, your maximum profit sharing contribution may be up to 20% of your net compensation (as shown on line 14 of Schedule K-1). If your LLC is a multi-member entity, your maximum profit sharing contribution may be up to 25% of your net compensation (as shown on line 14 of Schedule K-1).
How much can a single member LLC contribute to SEP IRA? ›
How much can I contribute to my SEP? The contributions you make to each employee's SEP-IRA each year cannot exceed the lesser of: 25% of compensation, or. $66,000 for 2023 ($61,000 for 2022; $58,000 for 2021; $57,000 for 2020 and subject to annual cost-of-living adjustments for later years).
Can a single member LLC have a retirement plan? ›
A single member LLC can have a 401k plan and your wife, the sole owner, can benefit under it regardless of the fact that you accrue benefits under the corporate 401k where you work. The issue is the amount that she can do. An LLC (unlike a corporation) renders your wife to be self-employed in that business.
Can I contribute full $6000 to IRA if I have 401k? ›
A work 401(k) is a nice perk to help you increase your retirement savings. If you're also trying to save outside of your employer-sponsored retirement plan, however, you might run into some problems. The good news is that you can contribute to an IRA even if you also contribute to a 401(k) at work.
Can my business contribute to my 401k? ›
Employers may make deductible matching contributions and/or profit-sharing contributions for each eligible employee up to 25% of the employee's compensation (to a max of $330,000), provided that the total for employer + employee does not exceed $66,000 for employees under age 50 or $73,500 for employees age 50 or older ...
If you are self-employed small business owner, you can set up a qualified retirement plan for yourself and your employees. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. You can also deduct trustee fees if contributions to the plan do not cover them.
Are contributions to LLC tax deductible? ›
Are capital contributions to an LLC tax deductible? Unfortunately, capital contributions are not tax deductible when it comes to contributions toward an LLC.
What type of retirement plan can an LLC have? ›
There are five main choices for the self-employed or small-business owners: an IRA (traditional or Roth), a Solo 401(k), a SEP IRA, a SIMPLE IRA or a defined benefit plan.
How much can self-employed contribute to retirement? ›
401(k) plan
Contribute up to an additional 25% of your net earnings from self-employment for total contributions of $66,000 for 2023 ($61,000 for 2022; $58,000 for 2021; $57,000 for 2020 and $56,000 for 2019), including salary deferrals.
How much can an LLC contribute to a Roth IRA? ›
A Roth IRA LLC has no rule that mandates a RMD. The account holder may keep the funds within the account as long as they desire. The contribution limit for a Roth IRA LLC in 2021 is $6,000. If the account holder is 50 or older, then the limit is elevated to $7,000.
How much can business owner contribute to 401k? ›
Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit: $23,000 in 2024 ($22,500 in 2023; $20,500 in 2022; $19,500 in 2020 and 2021), or $30,000 in 2023 ($27,000 in 2022; $26,000 in 2020 and 2021) if age 50 or over; plus.
Can an LLC have a SEP IRA and a 401k? ›
If both a 401(k) plan and a SEP IRA are offered by the same business, business owners can contribute to both plans simultaneously, however contributions between the two plans are limited to the maximum of 25 percent of compensation or up to $66,000 (whichever is lesser).
