Wednesday, December 3, 2014
Small Business Owners Top Retirement Strategies
As an owner of small business, you are responsible for your own retirement planning. Since you don't have an employer to set up a retirement plan or choose a set of possible investments for you, you're definitely not getting a pension.
This article that was originally posted at investopedia.com, will discuss the considerations and retirement savings plans that you, as a small business owner, should consider when planning for both your own retirement and that of your employees.
Develop an Exit Strategy
It might seem strange that developing a business exit strategy should be one of your first considerations when planning for retirement. But consider this: The small business you spend your life building might become your largest asset. If you want it to fund your retirement – and if you want to actually stop working – you’ll have to liquidate your investment.
To prepare to sell your small business one day, it needs to be able to operate without you. It’s never too early to start thinking about how to accomplish that goal and about how to find the best buyer for your small business. Who besides you could run your business? Who besides you might want to own it and might be willing to pay good money to do so? Are you interested in selling to a partner, a competitor, a relative, an employee? Do you want to retain a partial stake in your business or be done with it entirely?
Market conditions will affect your ability to sell your business for top dollar. You might want to build flexibility into your retirement plan so you can sell your stake during a strong market or work longer if a recession hits. You definitely want to avoid a distress sale: One problem you’ll encounter if you wait until the last minute to exit your business is that your impending retirement will create the impression of a distress sale among potential buyers and you won’t be able to sell your company at a premium. While 35% of small business owners said they were depending on income from the sale of their business to fund their retirement in a 2014 study by the Guardian Insurance and Annuity Company, only 17% had identified potential buyers.
Choose a Retirement Strategy
Next, let’s discuss some options for using your small business to fund your retirement while you’re running it.
Establish a SIMPLE IRA.
The savings incentive match plan for employees, or SIMPLE IRA, is one retirement plan available to small businesses. In 2015, employees can defer up to $12,500 of their salary, pretax, and those who are 50 or older can defer up to $15,500 by taking advantage of a $3,000 catch-up contribution. However, employees who participate in other employer-sponsored plans can contribute no more than $18,000 in 2015 to all employer-sponsored plans combined. Employees choose how to invest the money among the investments allowed by the financial institution that administers the plan, and they pay tax on the distributions when they withdraw them.
Employers can match employee contributions to a SIMPLE IRA up to 3% of the employee’s compensation. Or, employers can contribute 2% of each eligible employee’s compensation of up to $265,000 in 2015, meaning that the maximum employer contribution would be $5,300 per worker. Employer contributions are tax deductible.
Set up a SEP IRA. A simplified employee pension (SEP) is another type of individual retirement account (IRA) to which small business owners and their employees can contribute. In 2015, it lets employees make pretax contributions of up to 25% of income or $53,000, whichever is less. Like a SIMPLE plan, an SEP plan lets small business owners make tax-deductible contributions on behalf of eligible employees, and employees won’t pay taxes on the amounts an employer contributes on their behalf until they take distributions from the plan when they retire.
Almost any small business can establish an SEP. It doesn’t matter how few employees you have or whether your business is structured as a sole proprietorship, partnership, corporation or nonprofit. Each year, you can decide how much to contribute on your employees’ behalf – if anything – so you aren’t locked in to making a contribution if your business has a bad year. Owners of the business are also considered employees and can make employee contributions to their own accounts.
Overall, the SEP plan is a better option for many small businesses because it allows for larger contributions and greater flexibility. For more insight, read Business Owners: How To Set Up An SEP IRA.
Investigate other options: IRAs and Solo 401(k)s. If you’re in a competitive field and want to attract the best talent, you might need to offer a retirement plan, such as the two described above. However, employers are not required to offer retirement benefits to their employees.
If you don't, one way you can save for your own retirement without involving your employees is through a Roth or traditional IRA, which anyone with employment income can contribute to. You can also contribute to an IRA on your spouse’s behalf. Roth IRAs let you contribute after-tax dollars and take tax-free distributions in retirement; traditional IRAs let you contribute pretax dollars, but you’ll pay tax on the distributions. The most you can contribute to an IRA in 2015 is $5,500 ($6,500 if you’re 50 or older). Your employees can set up their own Roth or traditional IRAs, as well, of course.
Finally, if your small business has no eligible employees other than your spouse, you can contribute to a solo 401(k) – read 401(k) Plans For The Small Business Owner.
The Bottom Line
More than a third of small business owners surveyed in 2014 said they didn’t want to retire, a quarter said they don’t plan to retire, more than a third said they plan to divide their retirement time between work and leisure, and more than half said they would find it hard to completely retire. Even if you’re among the many small business owners who plan to keep working, establishing a retirement plan for your small business is a good idea because it gives you options – and having options means you’ll feel more satisfied with whatever path you choose.
If you want to run your business until the day you die, there’s nothing wrong with that, but you should do it because you want to, not because you’re financially forced to. And remember: A generous small business retirement plan is also an excellent incentive for top employees to join your company and stay there.
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