How to Make Retirement Contributions From an LLC? (Guide)

Delina Chantel Yasmeh
Published by Delina Chantel Yasmeh | Author
Last updated: April 14, 2024
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Retirement plans are a great way to save money for your retirement. It provides security and allows you to invest part of your income.

There are several LLC retirement plan alternatives available. Determine which type of account is best suited to your needs.

With over a decade of practice as a business consultant for limited liability companies, I have addressed clients’ concerns regarding retirement contributions in various states.

I conducted thorough research and collaborated with our team of lawyers to provide you with all the legal information you need about retirement plan options for LLC owners.

Quick Summary

  • To make retirement contributions from an LLC, select the right plan, estimate your post-retirement financial needs, and allocate funds accordingly.
  • LLC owners have various retirement account options, including traditional or Roth IRAs, solo 401(k), SEP IRAs, simple IRAs, and defined benefit plans.
  • Withdrawing early from a Roth IRA incurs a 10% penalty and taxes, yet its affordability and tax advantages attract new investors and transitioning entrepreneurs rolling over a 401(k).
  • From my experience, investing in a comprehensive retirement plan is the most effective strategy for LLC owners to ensure their financial security and peace of mind.


How To Make Retirement Contributions?

LLC retirement plan options inside an envelope

To make retirement contributions, you should choose which plan is suitable to your budget, retirement needs, and payment options.

LLC retirement plan options vary in terms of contribution amount, contribution limit, advances or withdrawals, and taxation payments.

We recommend weighing out the advantages and disadvantages before settling for a retirement plan that would best suit your needs.

  • The first step is to figure out how much you'll need to save for retirement with NerdWallet's retirement calculator. The amount you intend to save each year will determine the ideal account for you.
  • Second, determine where to invest the money. A balanced portfolio between securities and real estate is an ideal investment.

Here are five self-employed retirement plans that may be appropriate for you:

  • Traditional or Roth IRA
  • Solo 401(k)
  • SEP IRA
  • SIMPLE IRA (Savings Incentive Match Plan)
  • Defined benefit plan

1. Traditional or Roth IRA Retirement Plan

Traditional and Roth IRA written on a chalk board

The Roth IRA is a unique retirement savings option for individuals who have not yet reached the age of 59.5.

In this account, if you choose to allow investments to grow tax-deferred, your money can compound without you having to pay income tax and instead be distributed free from federal income tax under current law.

However, based on our experience, earnings may be subject to state and federal income taxes upon withdrawal if you haven't reached 59.5.

Withdrawing from your Roth IRA before age 59.5 incurs a 10% penalty and taxes, but its low costs and tax benefits make it appealing for newcomers and those transitioning from employment to entrepreneurship by rolling over a 401(k) into an IRA.

The IRA contribution limit is $6,500 in 2023 ($7,500 if age 50 or older) [1].

"The primary benefit of an IRA is its tax-deductible contributions, with Roth IRAs offering tax-free withdrawals in retirement, emphasizing that these plans are individual strategies, not group plans, allowing employees to contribute if eligible."

-Jon Morgan, Co-Editor & Co-Founder of Venture Smarter

2. Solo 401(k) Retirement Plan

Drawing from our experience, the Solo 401(k) plan, favored by self-employed individuals for its simplicity and tax benefits, allows contributions of up to 25% of net self-employment earnings, with a cap of $66,000 in 2023 and the option for profit-sharing contributions.

Unique for its loan feature against retirement savings, this plan supports tax-deferred growth until age 59.5 without penalties and includes employer match contributions, making it ideal for business owners without employees—spouses included.

Financial institutions offer setup services, and the plan permits catch-up contributions for those over 50, enhancing its appeal by mirroring the tax advantages of traditional employer-offered 401(k)s, but it's restricted to businesses without employees, except for a spouse.

3. SEP IRA Retirement Plans

SEP IRA notebook cover

The Simplified Employee Pension (SEP) plan, distinct from an IRA, is designed for companies or self-employed individuals with net earnings of $600 or more, offering a retirement savings option for those not immediately needing the funds for living expenses.

From our experience, to establish a SEP, contributions are determined by net income and the eligibility of employees, requiring decisions on funding methods and investment types.

Specifically catering to sole proprietors and single-owner LLCs without employees, the SEP allows for contributions of up to 25% of net self-employment earnings, capped at $66,000 in 2023.

This plan mirrors the tax benefits of traditional 401(k)s, with pre-tax contributions and taxable benefits post-age 59½.

Contributions are tax-deductible for both incorporated and unincorporated businesses, the latter with the stipulation that such deductions exceed 2% of adjusted gross income, highlighting the SEP's appeal for small business owners seeking simplified, tax-advantaged retirement savings strategies.

4. SIMPLE IRA Retirement Plans

A SIMPLE IRA requires company sponsorship or self-employment with net earnings of $600+, offering matching and discretionary contributions up to $15,500 for those under 50 and $19,000 for those over 50 in 2023.

Drawing from our experience, the SEP plan, suitable for small company employees, allows contributions of up to 100% of compensation without the need for individual account management, providing access to professional investment services.

Designed for sole proprietors and single-owner LLCs without employees, it simplifies retirement savings akin to a 401(k), requiring decisions on funding methods and investment types.

Both plans share the tax advantages of traditional 401(k)s, with pre-tax contributions and taxable benefits post-59½, streamlining retirement planning for small business owners and self-employed individuals.

5. Defined Benefit Retirement Plan

Defined Benefit Plan notebook cover

This plan can be offered by sole proprietorships, S corporations, LLCs that are taxed as partnerships, and self-employed individuals.

Participants must provide proof of age and service to qualify for retirement benefits.

You'll need to consult with a firm that specializes in defined benefit plans to find out how much you'll have to put into the plan each year to accumulate enough money for your retirement.

Contributions must be made in cash and are tax-deductible, unlike contributions to SIMPLE IRA plans, SEP plans, or SEP-IRAs.

The total annual contribution rose from $245,000 in 2022 to $265,000 in 2023 per year.

This approach has some drawbacks: for one thing, there's no convenient way to transfer the benefit of this type of plan to your heirs without paying taxes on it.

And if you change or lose your job, the benefits are taxable as ordinary income until you reach age 59½.

Complications of Retirement Plans

If you have many employees and want to provide retirement benefits that are at least partly tax-deferred, we recommend not using SEP plans as a substitute for 401(k)s because of contribution limits.

It is also more difficult to set up SEP plans than simplified profit-sharing plans or salary reduction simplified employee pensions (SARSEPs), and SEP plans must be set up before they can accept contributions.

Furthermore, SEP plans have stricter guidelines that you will need to follow if you want to deduct your retirement contribution as a business expense on your tax return as compared with simplified profit-sharing plans.

For those reasons, the best way to plan for retirement is to set up a SEP plan or salary reduction simplified employee pensions (SARSEPs), which are similar to SEP plans but easier and less costly to establish.

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FAQs

How Does an LLC Member Contribute to a 401K?

An LLC member can contribute to a 401k in the form of salary deferral contributions or employer matching contributions. An LLC member can also contribute SEP plans if the business is eligible.

Can an LLC Owner Contribute to a 401K?

An LLC member who performs any services for the LLC can make salary deferral contributions to a 401k.

Can My LLC Contribute to My IRA?

Your LLC can contribute to your IRA or Roth IRA with a simplified one-participant 401k plan.

Can I Contribute to My IRA From My Business Account?

You can contribute to both a SEP plan and your IRA from the same business account.


References:

  1. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

About The Author

Author
Delina Chantel Yasmeh, J.D./Tax LL.M, specializes in Mergers and Acquisitions at Deloitte and PwC, managing billion-dollar transactions. Educated in Accountancy at California State University and holding advanced degrees from Loyola Law School, she is highly skilled in tax law. Delina also dedicates time to pro bono work for women and children.
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Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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