Planning for Retirement as a Small Business Owner

EDITOR’S NOTE: The following article was originally printed by the National Federation of Small Business

There are options for retirement other than a complicated 401(k).

A lot of small business owners are so focused on starting and maintaining their businesses, they neglect to plan for retirement. While small businesses typically do not have the ability to offer 401(k) plans, there are other options available too.

Succession planning isn’t enough

Many small business owners make the mistake of believing that the sale of their business will provide them with a large enough windfall to cover their retirement. This is an unwise assumption. “Don’t rely solely on the profits of selling your business. Have a contingency plan in place and start saving early in the event that your business does not sell at the right price at the right time,” said Paul Davidson, director of human resource services at Paychex in Rochester, New York.

Consider a simplified employee pension or a simple IRA

“A simplified employee pension (SEP) or SIMPLE IRA are great alternatives to the more complicated 401(k),” said Certified Financial Planner Jon Sycamore of Sycamore Wealth Planning in Salt Lake City.

“A SEP is great for solopreneurs because contributions are optional in any given year and can be as much as $55,000. The reason SEP IRAs don’t work well when you have employees is that when contributions are made, you are required to make employer contributions equivalent to the same percentage of compensation to all eligible employees. For example, if you want to put away 20 percent of your compensation into your account, you’ll also have to put 20 percent of your employee’s accounts as well,” he said.

For small businesses with employees, Sycamore recommends a simple IRA.

“A simple IRA works more similarly to a 401(k), but with much less complexity. I like to think of it as training wheels for a 401(k), which will eventually make sense to switch over to as your business grows and needs become more complex,” he said.

There are tax benefits for providing retirement options for employees

A common misconception among small business owners is that offering a retirement plan for employees is too expensive.

“The tax benefits for owners-up to $1,500 ($500 per year for three years)-may help offset the cost. Additionally, employer matching is not required with all retirement plans. But keep in mind, not only can matching help maximize your personal contributions, but all matches are tax deductible,” Davidson said.

Succession planning should be part-not all-of your retirement plan

It’s important to diversify, but succession planning should be part of your plan for retirement. “Build [your business] in a way that looks forward to selling it as an asset and maximizing that valuation,” said Chad Gordon, a financial advisor at GreenStar Advisors in Denver. “This means focusing on reoccurring revenue, establishing a brand-”don’t have the business named after yourself-and owning real estate and equipment. Keep excellent records and bookkeeping, show a track record of growth, and demonstrate customer loyalty. Not only are these excellent business practices, but in a sense, they are contributions to your retirement.”

Consult with a financial advisor as soon as possible

Finally, don’t be afraid to ask for help.

“Small business owners aren’t always experts in financial planning, but you don’t have to be,” Davidson said. “A financial advisor from any financial institution, including your local bank, can help you take the next step with a retirement plan. A plan provider can walk you through the various plans available and help you identify the most financially viable and ultimately beneficial retirement option for you.”

Many financial advisors offer free consultations to discuss your options and how they might help you meet your needs. So starting the process might not cost you anything.

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