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

Episode Summary

Executive Summary: The episode is a Bloomberg At The Money discussion on retirement savings options for small business owners and solo practitioners. Barry Ritholtz and Dan LaRosa compare SEP IRAs, solo 401(k)s, and solo 401(k)s with mega backdoor Roth features, focusing on contribution limits, flexibility, compliance, timing, creditor protection, and spouse participation. The central message: the best plan depends on income, goals, and administrative tolerance.

Main Topics: Retirement plan choices for small business owners (Priority: 5/5): The conversation opens by outlining the main tax-advantaged retirement vehicles available to owners and solo workers: SEP IRAs, solo 401(k)s, mega backdoor Roth solo 401(k)s, and, for higher earners, cash balance defined benefit plans. Contribution limits and how they work (Priority: 5/5): A major focus is how the $72,000 annual plan limit works across different structures and how the employee deferral limit aggregates across plans, while employer contributions are calculated differently for SEP and solo 401(k) plans. Choosing between SEP IRA and solo 401(k) (Priority: 5/5): The guest explains that SEP IRAs are simpler and often recommended first, but solo 401(k)s offer more flexibility, especially for lower or variable income and for maximizing Roth-style contributions. Administrative burden and compliance (Priority: 4/5): The discussion covers setup and maintenance differences, including the lack of annual filings for SEPs versus the solo 401(k) filing trigger at $250,000 in plan assets and the severe penalties for missing Form 5500EZ. Timing and retroactive funding rules (Priority: 4/5): The speakers explain that both SEPs and, under newer rules, solo 401(k)s can often be established and funded for the prior tax year, with important deadlines tied to April 15 and the extended filing deadline. Spouses, partners, and plan eligibility (Priority: 4/5): The episode clarifies that spouses can participate if they are legitimate employees, and that some partner structures can still qualify for a solo 401(k) so long as there are no non-owner employees. Creditor protection and ERISA (Priority: 4/5): The discussion notes that solo 401(k)s do not receive the same ERISA creditor protections as employer 401(k)s or defined benefit plans, making them similar to IRAs in this respect.

Key Arguments: SEP IRAs are often the default choice because they are simpler to set up and maintain, even when a solo 401(k) might be more advantageous. Solo 401(k)s provide greater flexibility for lower or fluctuating income because contributions are not as tightly tied to net income as SEP contributions are. A mega backdoor Roth solo 401(k) is uniquely powerful for workers who want to make large Roth contributions, because it can allow up to the full annual plan limit in Roth form. Each retirement plan has its own $72,000 limit; the employee deferral limit is the main amount that aggregates across plans. For SEPs, contributions are employer-only and can reach about 20% of net income, which means very high earnings are needed to max out the plan. For solo 401(k)s, employee and employer components allow higher contributions at lower incomes than a SEP, making them better for many side-hustle or solo-practice earners. Solo 401(k)s become more complex when non-owner employees become eligible, while SEPs can become expensive because they require pro rata contributions to eligible employees. Solo 401(k)s do not automatically provide the extra ERISA creditor protection that many people associate with 401(k)s; they are treated more like IRAs for protection purposes. Adding a spouse as a legitimate employee can materially increase household retirement savings, provided the spouse is on payroll and earning wages.

Data Points: Bloomberg News Now episode length: 5 minutes - Described in the opening promo for on-demand news updates. Plan annual limit: $72,000 - Repeatedly cited as the total annual contribution cap for each plan. Employee deferral limit: $24,500 - Identified as the amount that aggregates across all plans. SEP contribution rate: 20% of net income - Explained as the employer contribution framework for SEPs. Income needed to max SEP: $360,000 - Guest estimates this income level is needed to reach the $72,000 limit with a SEP. Income needed to max solo 401(k): about $235,000-$240,000 - Estimated income range to reach the $72,000 cap using a solo 401(k). Solo 401(k) filing threshold: $250,000 in total plan assets - When assets reach this amount on December 31, Form 5500EZ must be filed. Form 5500EZ penalty: $250 per day up to $150,000 - Penalty discussed for failing to file the required form for a solo 401(k). Employee eligibility rule for SEP: 3 out of 5 years - The guest describes SEP eligibility as the "three of five" rule. SEP eligibility compensation threshold: about $700-$750 - Nominal earnings level cited for SEP employee eligibility. Prior-year SEP funding deadline: tax filing deadline plus extension - The SEP can be established and funded retroactively within this window. Solo 401(k) retroactive setup cutoff: April 15 - If set up by April 15, employee and employer contributions can be made for the prior year. Solo 401(k) funding deadline for full contribution: October 15 with extension - Extended filing deadline cited for funding the plan to the full amount. Over-50 catch-up reference: $32,500 - The host references a higher employee deferral amount for those over 50. Podcast attribution: Bloomberg's At The Money - The retirement discussion closes with this show identification.

Pivotal Quotes: "The solo K with the mega backdoor Roth, it's a bit of a cheat code." — Dan LaRosa: Used to emphasize the unusually strong Roth contribution capability of the solo 401(k) structure. "The lower your income is, the more powerful the solo 401(k) is." — Dan LaRosa: Explains why solo 401(k)s can outperform SEPs for smaller or variable earners. "They do not." — Dan LaRosa: Answering whether solo 401(k)s receive the same enhanced creditor protection as employer 401(k)s.

Implications: Small-business owners and solo earners should match plan type to income, goals, and compliance tolerance. The right choice can materially boost tax-advantaged savings, but mistakes on filings, eligibility, or spouse participation can be costly.