Planning for Retirement as a Small Business Owner

retirementThe days of pensions are long-since over for most working Americans. They have, instead, been replaced with 401k, 403b, and other such employee-funded retirement options. Still, there is a plan in place through most large employers in America, meaning there is a path to follow to retirement. The same cannot be said of small business owners and their employees. Many are so hyper-focused on their business, they do not have the capacity to think about the day when they no longer run the business.

Unfortunately, this leads many small business owners to continue working well beyond the age at which they expected to retire. With every penny of earnings being reinvested in a business, there is nothing there to leave said business. And if the business holds no inherent value, or if that value is less than what is required to create a decades-long income stream, it can quickly become too late to consider retirement.

To help combat this, retirement planning should be a focus early. It can be accomplished through IRAs, SEP IRAs, SIMPLE IRAs, or self-employed 401k plans. The first three, which are variations on an IRA, have different structures based upon the number of employees and size of contributions which you would like to make as the employer per employee. The Traditional IRA is the simplest, and acts outside of your self-employed status, meaning you are not required to make contributions on behalf of your employees. The SEP, on the other hand, requires 100% of the contribution to come from the employer, and it must be available to all employees. So this can become expensive if you have many employees, as they will all receive a deposit. The SIMPLE IRA allows for both employer and employee contributions, which can allow you to save money on contributions for employees while increasing your contribution limits.

The fourth option, the self-employed 401k plan, has a whole host of different options depending upon the number of employees, the contribution types, and the matching and vesting options. Further, these can be either Safe-Harbor or Non-Safe-Harbor plans, which can impact their costs. Finally, 401ks are generally the most expensive plans to maintain, but they can offer a lot which can’t be offered in other plan types.

Ultimately, you want to speak with a financial planner or CPA about your options and which makes the most sense for your small business. But make sure you have that conversation, because if you don’t start today, you may never be able to retire tomorrow.

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