How to manage retirement as a small business owner
“When you are a small business owner, almost every part of your business is linked to your personal life. You are your business and you are your business,” said David Burton, tax advisor at Harness Wealth.
Having a retirement plan in place and putting money aside early can ensure you have a solid financial cushion when you make the decision to retire.
1. Assess your retirement needs
It is important to determine how much money you will need to live comfortably in retirement.
Be sure to calculate potential scenarios, for example if you decide to sell the business or if you no longer generate income from the business.
2. Create an exit strategy
You will need to determine what to do with your business when you retire. This includes having an exit strategy.
This could mean transferring ownership of the business to someone else, selling the business, or holding an initial public offering. When deciding on an exit strategy, consider how long you want to be in your business, how best to protect your business investments, and what your financial situation and goals are.
“A lot of business owners don’t always think about their exit or retirement plan for their business. It’s never too early to plan for that,” said Kristen Carlisle, Managing Director of Betterment 401 (k).
In many cases, an exit strategy should be part of your initial business plan and your pitch.
3. Decide which retirement savings plan is right for you
Once you have an idea of your retirement needs and have an exit strategy for your business, it’s time to figure out which retirement savings plan is right for you.
Consider plan contribution limits, the number of employees you have and the tax benefits associated with the type of account you choose.
“No matter where you are on your business planning journey, it’s important that you think about how to create a retirement plan for yourself. If you have employees, it’s also a great idea to offer them a retirement benefit, so they can feel supported and financially prepared, ”Carlisle said.
Here are the five most common types of self-employed retirement plans:
Traditional or Roth IRA
- A traditional or Roth IRA is a retirement savings account with tax breaks. With a traditional IRA, you only pay taxes on your money after you make withdrawals at retirement. Since taxes are deferred, your investment earnings have the potential to grow faster. Traditional IRAs can be deductible or non-deductible. A deductible IRA allows you to deduct your contributions on your tax return, unlike a non-deductible IRA. With a Roth IRA, you pay taxes on the money you put in upfront, allowing your money to grow tax-free, and when you retire you pay no taxes. You or your employees can create and contribute to their own IRAs. Old 401 (k) from a previous job can also be transferred to an IRA.
SEP (Simplified Employee Retirement)
- A SEP IRA is a type of tax-deductible account for self-employed or small business owners – this can also include anyone with independent income. SEPs work like traditional IRAs in that contributions are not taxable until withdrawn. This type of account can be opened either by an employer or by a self-employed person and allows the employer to contribute to the accounts of his employees. They offer a higher contribution limit that can be made in addition to traditional or Roth IRA contributions.
SIMPLE IRA (Employee Investment Savings Plan)
- A SIMPLE IRA is another type of tax-deductible account for the self-employed or small business owners. Unlike SEP IRAs, employees can contribute, not just the employer. SIMPLE IRAs also require the employer to either make a dollar-for-dollar match of up to 3% of an employee’s salary or a lump sum of 2%. whether or not the employee contributes.
Solo or Individual 401 (k)
- The solo 401 (k) is a 401 (k) individual for a self-employed person or a small business owner with no employees. Solo 401 (k) work the same as traditional 401 (k) offered by large companies and employers. They come in both a Traditional and Roth variety, just like IRAs. Contributions can be shared between the two.
- A defined benefit plan is a type of employer sponsored retirement account, like a pension. The employer decides on a fixed amount when you retire based on factors such as salary and length of service with the company. At retirement, you can either opt for a lump sum payment or for a monthly “annuity” payment.
4. Make retirement planning a priority
Sometimes it can be easy to get caught up in the day-to-day operations to keep your small business afloat. But either way, don’t make the mistake of neglecting pension benefits for you or your employees, Carlisle said.
“Make sure you think about your own future, the future of your employees, no matter the size of your organization,” she said. “You don’t have to start big, you can start small and grow from there, as long as you don’t ignore the benefits.”