Retirement Planning for Small Business Owners

An unfortunate truth of running a small business is that there is no retirement plan in place for you. There is no pension, no company 401k, and many small business owners can’t qualify for full Social Security benefits. Every penny beyond basic living expenses is often put back into the business, meaning nothing is put aside for your future retirement. And while some are able to sell their business at some point and earn enough to live comfortably in retirement, there should always be a plan in place for what happens when you are ready to retire.

The most common, and easiest option is a Traditional or Roth IRA. So long as you are showing income, these retirement accounts allow you to contribute up to $5500 per year, with an additional $1000 per year in “catch-up” contributions after age 50. For married couples, a spousal IRA can also be established for the spouse of the business owner, even if that person is not technically earning any income.

Many younger business owners opt for the Roth option, which allows you to pay taxes on the money this year, but gives you the full balance plus all accrued interest tax-free at retirement. A traditional IRA, which is more popular with older business owners, allows for full tax deferral on the contribution this year, however, when it is taken out in retirement, it will be taxed, as will all of the growth.

Another option is to establish a 401k for your business as has implemented over the past year. For a one-person business, this would be a solo 401k. If however, you employ others, then you need to consider which type of 401k is right for your business and you need to consider Safe Harbor Laws. But with a solo 401k, you (and a spouse) can max out on your personal contributions, then allow your business to contribute up to an additional twenty percent of your earnings. These plans can be complicated to set up, require a plan administrator, and have fees associated with them as a result, but they also can offer huge contribution benefits.

A different take on the IRA, the SEP IRA is a very popular option for self-employed individuals. The Simplified Employee Pension IRA option allows for the largest contributions of all of the IRAs, however, it can become very expensive if you have employees. With a SEP, you can contribute the lesser of 25 percent of your net income or $53,000. Unfortunately, with a SEP, every employee must be included and every dollar contributed must come from the employer. So if you have 20 employees and want to max your contributions, the business must also max the contributions of every eligible employee.

And finally, the SIMPLE IRA is a mix between a SEP IRA and a Traditional IRA. The Savings Incentive Match Plan for Employees IRA is available to any business with 100 or fewer employees. The SIMPLE IRA allows for contributions of up to $12,500, with “catch-up” contributions of an additional $3,000 for employees over age 50. Employers are also not on the hook for as much of the burden – the company must either contribute two percent of an employee’s total compensation or match between one and three percent of the total compensation. So unlike the SEP IRA where the employer pays the full amount, the employee is required to fund some of this IRA.

Ultimately, if you own a business, it is important to have some form of retirement plan in place to safeguard your future. And while this should give you a place to start in thinking about your options, you ultimately want to reach out to your CPA who can help guide you in your decision, weighing out what is most appropriate for you.

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