Evaluating Retirement Plans for the Small-Business Owner

Retirement plan for the small business

Take action to fund your retirement plan

Small business owners need to plan for retirement.

Too many small business owners overlook the importance of saving for retirement in spite of the fact they are all too aware they will not be able to operate their business indefinitely. After all, none of us is going to work forever, even if it feels like we are doomed to do just that. So, it is sensible to start planning for retirement, even if you are in your 20’s or 30’s. Naturally, the older you are the more important it is to start saving sooner rather than later.

The good news as a self-employed or small business owner, you have options. The IRS recognizes many plans for the self-employed and small business owner and allows noteworthy deposits to your retirement accounts.

Keep in mind, not all plans are right for all investors; you will have to decide which plan or combination of plans is right for you and how much aggravation you are willing to put up with to make the plan work.

The following is a broad overview of some of the available retirement plans:

  • Simplified Employee Pension (SEP IRA) – I like things that are easy and efficient. For those reasons, and for others, I like SEP-IRA’s. A SEP-IRA is among the easiest of all retirement accounts to set up. In fact, these accounts typically require only a single page application. Deposits in these accounts during 2015 may be as high as $53,000. This is great news because after all, who doesn’t like a tax deduction.
  • 401(k) Plans – Oftentimes small business owners are not aware they are eligible to open these plans as they believe they are limited to larger businesses. However, there are plans that are called Solo 401(k) or Uni-k which may be a great option for those who are self-employed with no employees. These plans allow you, the small business owner, to contribute matching funds (from your company) as well as funds directly from your earnings. The amounts that may be deposited increase annually and in 2015, those who are self-employed may be able to deposit as much as $53,000. A 401(k) plan allows for more customization than the above mentioned SEP-IRA, and can be designed to meet specific needs. Bottom line, 401(k) plans tend to allow for flexibility.
  • Savings Incentive Match Plan for Employees (SIMPLE) – SIMPLE IRA plans, if you ask me, are never that simple; therefore, generally, I am not a big fan of SIMPLE plans for self-employed individuals and small business owners. These plans allow you to put net earnings from self-employment into your retirement in amounts up to $12,500 for the 2015 tax year and if you are over age 50, you may be able to contribute higher amounts. These plans can be set up through October of the current tax year to help you defer income and take advantage of the tax benefits of an IRA deposit. A SIMPLE plan offers a few features of the 401(k) plan with significantly less paperwork. The problem of course is they are not nearly as flexible as some of the other plans that are available.

There are other plans available to you if you are self-employed including profit-sharing plans and money purchase plans which can be used by entrepreneurs.

Each of the plans mentioned here have their own advantages and disadvantages and you will have to review those before you make a final decision. Your personal and business goals may impact which plan is best for your specific needs. After all, your retirement plan should be customized to meet your goals.  It shouldn’t be a “cookie cutter” approach offered as an “add-on” by a payroll provider.

I fully understand how much work it is to run a business and the last thing you want to think about today is what happens when you retire. However, the cold hard fact is that you may eventually retire, so you should start planning.

If you are not interested in thinking about it as planning for the future, think about this: Not only can you save for your retirement but you get the added benefit of reducing your overall current income tax burden. Show me one person who thinks paying less in taxes is bad news.

None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation. Withdrawals would be subject to federal income tax in the year they are withdrawn.  A penalty tax may be imposed for early withdrawals.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

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