Small business owners are often a little like new parents. They pour so much of their time, energy and love into caring for their progeny, they don't take care of themselves. You see this in new moms and dads in the bags under their eyes and the new spare tires around their middles. You see it in small business owners in the anemic balances in their (sometimes non-existent) retirement accounts.
And that's a shame. Because in reality, folks who work for themselves have some great (not to mention, tax-advantaged) opportunities to stash away cash for the future. We'll take a look at the options in a moment, but two of the big questions you'll face off the bat are do you have employees (other than yourself and your spouse) and do you want to contribute for them. It's a requirement in some cases, but not others. And though offering to contribute can be a powerful incentive to keep your employees loyal and happy, it's not something all small businesses can afford, particularly in the start-up phase.
First of all, if you're eligible for a Roth IRA (your modified adjusted gross income must be less than $127,000 for single or married filing separately, or $188,000 for married filing jointly), you should start there. But that only accounts for the contribution limit of $5,000 a year ($6,000 if you're 50 or older).
For the rest of your retirement savings contributions, look to the Solo 401(k). This option allows you to contribute up to $17,500 in 2013 as an employee (i.e. your own employee). That's the same contribution limit as a 401(k). Then, as the business owner, you can also contribute 20% of your self-employment income, up to a combined maximum of $51,000 (in 2013; these limits adjust each year for inflation). And if you're over age 50, you can make catch-up contributions of an extra $5,500 each year. Contributions to a Solo 401(k) are tax-deferred. You'll be taxed when you withdraw the money after age 59 ½ (like a traditional 401(k), you'll incur a 10% penalty if you withdraw the money earlier).
A solo 401(k) can be a great option, but if you have any employees (other than your spouse), you're not eligible. In that case, you should consider something called a SEP IRA. This account allows you to contribute 20% of your business income, up to $51,000 in 2013, but doesn't allow you to also make an employee contribution for yourself. Your contributions will be tax-deductible, and you can open plans for your employees and contribute on their behalf. You'll incur the same penalties as you would with a 401(k) if you make an early withdrawal.
Other options you may have heard of are Keoghs, which tend to make sense only for high-income business owners with low-income employees (for instance, a doctor might open a Keogh because while his income is likely good, he may pay his receptionist very little). A Simple IRA is the opposite -- quite complicated -- and only a better option than a SEP if you have a good number of employees. That's because with a SEP IRA, you're contributing your own money to your employee's accounts. With a SIMPLE, the contribution is a salary deferral, which means they are contributing their own. To be eligible for a SIMPLE, you must have fewer than 100 employees.
One thing to keep in mind with all of these: You want to think about the big picture. Maybe you don't have any employees now, but do you envision a time when you might? If so, you should probably talk with a tax professional to find a solution that is best for your situation.