Retirement plans for small business owners are often overlooked. Small business owners spend most of their time consumed by building the best business possible, making customers happy, and taking care of their employees. So it’s important that they focus on their own retirement plan.
Let’s look at why retirement planning is important, and how to choose the right types of retirement plans for small business owners.
Why is retirement planning important for owners of small businesses?
As a small business owner, retirement planning is crucial to help ensure financial security and a comfortable retirement. As we said before, you have likely spent considerable time building your business and focused on the future of your team, but that often means that you haven’t thought much about the day when you finally step away from the business you built.
In our blog, we’ve mentioned that “Retirement planning is the process of intentionally working through the many factors to consider in order to retire comfortably. It involves calculating your expected retirement expenses and then figuring out how best to save for them. Still, it also involves soul searching and thinking of what kind of retirement you want to pursue.”
Here are some tips on how to get the most from retirement planning:
Start early
The earlier you start planning and saving for retirement, the more time your money has to grow. Even if you can only contribute a small amount each month, it can make a big difference over time.
Consider a retirement plan
There are several retirement plans available to small business owners, including a Simplified Employee Pension (SEP) plan, a Savings Incentive Match Plan for Employees (SIMPLE) IRA, and a 401(k) plan. These plans can offer tax advantages and help you save more for retirement. We’ll look more closely at these later.
Diversify investments
Invest your retirement savings in a diversified portfolio of assets to help manage risk and maximize returns. Consider seeking professional advice from a financial planner or advisor.
Review and adjust regularly
Regularly review your retirement plan and adjust your contributions and investments as necessary. As your business grows, your retirement needs may change.
Challenges for retirement planning for small business owners
Simply put, there are only so many hours in a day. Effective retirement planning takes time, effort, and experience.
As an example, the best retirement plans for small business owners with employees may not be the best retirement plans for small business owners without employees. If you don’t know which to choose, it may negatively impact your financial situation.
Another challenge is that many small business owners have variable income. Unlike those who draw a steady corporate salary, your business may have lean periods throughout the year. A retirement plan that’s flexible may allow you to contribute in big chunks over time, as opposed to a steady payroll deduction.
The good news is that a financial advisor can help with these challenges. They have the time to stay on top of your plan, the experience to execute it, and the knowledge to understand how to get you where you need to be to meet your goals. They can help, for example, put together a plan of expected profit so you can determine your contribution percentage, overcoming the variability in income.
Benefits of retirement planning for small businesses
Retirement planning may have tax benefits. When you contribute to a retirement plan, most allow you to do so on a pretax basis. Much of the time, contributors are able to deduct portions of their contributions from federal and state taxes. There have been recent changes in laws that may allow you to get a tax credit simply for opening a retirement plan.
Bringing in a professional financial advisor can help you prevent leaving money on the table.
Types of retirement plans for small business owners
Forbes says “You have plenty of great options to save for retirement if you’re a small business owner. So, take a moment away from your daily tasks to look into your own retirement strategy.” Generally, we will work with small business owners to help them choose between these 5 types of retirement plans:
1. 401K
A 401(k) is a retirement savings plan that is offered by many employers in the United States. It is named after the section of the U.S. tax code that governs it. Under a 401(k) plan, employees can elect to have a portion of their pre-tax income automatically withheld and contributed to a retirement savings account. If you do not have any employees, you have the ability to set up a Solo 401(k), which operates the same way as a traditional 401(k).
2. SEP IRA
A SEP IRA (Simplified Employee Pension Individual Retirement Arrangement) is a type of retirement savings plan that is designed for self-employed individuals and small business owners. A SEP IRA is “inexpensive for employers to establish and easy to maintain. Employer contributions aren’t required annually, making it a good option for business owners who only want to contribute during high-profit years.” All contributions are immediately vested so if you have high turnover amongst your employees, you’ll want to take that into consideration.
3. Simple IRA
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is easy to set up and has a low contribution and matching requirements for employers. It allows employees to contribute more than they could with traditional or Roth IRAs.”
4. Traditional IRA
A traditional IRA (Individual Retirement Account) is a type of retirement savings account that allows individuals to save money for retirement on a tax-deferred basis.Contributions you make to a traditional IRA are in most cases fully deductible, but that may depend on your income and other factors.
5. Roth IRA
A Roth IRA is a special individual retirement account (IRA) in which you contribute to the account with after-tax money, and then all future withdrawals are tax-free if the account has been opened for over 5 years and you are older than 59 ½.”
As you can see, there are a lot of choices for retirement plans for business owners. Making sure that you pick the best option for you and your goals may make all the difference in your retirement years. Fortunately, you don’t have to choose alone–and we recommend that you don’t.
Schedule a free assessment with Dechtman Wealth Management today.
