3 Retirement Savings Vehicles for Small-Business Owners

November 10, 2016

 

Owning a small business can be a financially and personally rewarding experience. However, it can also be very challenging at times. As the owner, you likely wear multiple hats. On some days you may be the chief recruiter, marketer and salesperson. Other days you may be a supervisor, product developer and accountant. You have your hands on every aspect of the business.

 

With so much on your plate, you may not have time for retirement planning. Or, like many business owners, you may believe that proceeds from the sale of your business will fund your retirement.

 

Unfortunately, that assumption could prove to be inaccurate. You may struggle to sell your business, or you may not be able to find a suitable successor owner. There’s also the possibility that the sale of your business may not generate enough cash to fund your retirement.

 

 

That’s why it’s so important to also have traditional retirement savings in addition to your business’s value. If you can save for retirement during your career, then you will also have a nest egg to fall back on in the event that your business can’t be sold or transitioned successfully.

 

The good news is, as a business owner, you have several appealing options available as retirement savings vehicles. Review the options below and consider which may be best for your business.

 

Solo 401(k)

 

The solo 401(k) has much in common with its traditional 401(k) counterpart, but it also has some unique advantages for business owners. Like a regular 401(k), the solo is tax-deferred with pretax contributions, potentially lowering your taxable income. It has a 2016 contribution limit of $18,000 for those age 49 or under, with an additional $6,000 catch-up contribution for those ages 50 or older.1

 

One major difference, though, is that in a solo 401(k) you can also contribute up to 25 percent of your business earnings. That’s on top of the standard contribution limit. Your total contribution cap for 2016 is $53,000. Also, you can hire your spouse, and he or she can contribute as much as $53,000 as well.1

 

Keep in mind that a solo 401(k) is meant for self-employed, solo entrepreneurs. If you hire employees and want to include them in the plan, you may need to convert to a different option.

 

SIMPLE IRA

 

The SIMPLE IRA is a relatively low-maintenance plan designed for small businesses with a handful of employees. SIMPLE stands for savings incentive match plan for employees. It allows you to make employee retirement contributions without the complexity that comes with a 401(k) plan.

 

The plan is tax-deferred, and contributions are tax-deductible. Also, your matching contributions to employees are deductible as well. In 2016 you can contribute up to $12,500 if you are age 49 or under, with an additional $3,000 in catch-up contributions if you are age 50 or older.2

 

One important point about the SIMPLE IRA is how the employee contributions work. You can match up to 3 percent of an employee’s contribution. However, you may have to make a 2 percent employee contribution regardless of whether employees contribute. If you’re not prepared to make those contributions, a SIMPLE IRA may not be the plan for you.3

 

SEP IRA

 

Finally, a SEP IRA can be a great option if you are a solo entrepreneur or if you have very few employees. Like the other plans, a SEP is tax-deferred and has tax-deductible contributions.

 

One of the benefits of a SEP is that it has high contribution limits. In 2016 you can contribute up to the lesser of $53,000 or 25 percent of your business earnings. However, if you have employees, you must also contribute the same rate to their SEP account. So if you give yourself a 25 percent contribution, you must also give your employees a contribution that equals 25 percent of earnings.4

 

Ready to start saving for your retirement? Let’s talk about it. Contact us at Bridgeriver Advisors. We welcome the opportunity to help you determine which plan is right for you. Let’s connect today and start the conversation.

 

 

1https://www.irs.gov/retirement-plans/one-participant-401k-plans

2http://www.forbes.com/sites/ashleaebeling/2015/10/21/irs-announces-2016-retirement-plans-contribution-limits-for-401ks-and-more/#6bcf80e6dbd1

3https://www.irs.gov/retirement-plans/simple-ira-plan-faqs-contributions

4https://www.irs.gov/retirement-plans/plan-participant-employee/sep-contribution-limits-including-grandfathered-sarseps

 

This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

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