Retirement Planning: Strategies and Benefits for Business Owners

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Retirement planning is always a crucial aspect of your money management both for short-term and long-term financial goals. However, if you are a business owner, all of your funds and resources often go into keeping your company afloat and growing as opposed to other sustainable investments. 

Unlike salaried employees who might have the benefit of employer-sponsored retirement plans, as a business owner, you must proactively design and implement your retirement strategies.

Here are some key takeaways as to why retirement planning is essential for business owners and how they can navigate this complex but vital process:

• If you are hoping to sell your business once you reach retirement age and use the profit as a nest egg, keep in mind there are no guarantees for how much you’ll earn from the sale. Essentially, don’t put all your nest eggs in one basket. 
• As a small business owner, you’re responsible for not only your retirement income but also the earned income and potentially matching contributions to your employee retirement plans. 
• A few of the most straightforward ways to set up individual retirement accounts (IRAs) are to establish a SIMPLE IRA, a SEP IRA, a traditional or Roth IRA and a Solo 401(k), all of which are a solid savings strategies.

Here are some key retirement planning strategies for ambitious business owners.

Start Strategizing With These 3 Retirement Savings Plans

Once you hit age 50, or well before that in many cases, how you’ve been saving for retirement and what you have in your accounts is pitted against skyrocketing housing markets, a volatile stock market and general cost-of-living increases.

If you own a business it seems like you have to prepare all possible outcomes and hope what you have is enough to last you through your golden years.

To put your best foot forward, you can try one, or preferably a combination, of the following:

SIMPLE IRA

A Savings Incentive Match Plan for Employees, also known as a SIMPLE IRA, is a plan for you and your employees. Both you and your employee can contribute money up to the 2024 contribution limit of $16,000. For those aged 50 or older, you can defer up to $19,500 by taking advantage of a $3,500 catch-up contribution.

With this plan, you can match your employee contribution up to 3% of the employee’s compensation or contribute 2% of each eligible employee’s compensation of up to $345,000 in 2024. Though you are not required to provide retirement plans as a benefit, all of your employer contributions are tax deductible and can incentivize your employee motivation and loyalty. 

SEP IRA

A SEP IRA, short for simplified employee pension, is another IRA to which you and your employees can both contribute. As a small business owner, this plan allows you to make pretax contributions of up to 25% of income or $69,000 depending on which is less, and all contributions are tax-deductible.

It’s also good for your employees to note that they won’t pay taxes on the amounts an employer contributes on their behalf until they take distributions from the plan upon retirement. 

What’s nice about these plans is that they work no matter how many employees you have, and the amount you contribute is flexible. This is beneficial because if you have a bad business year you aren’t mandated to a specific amount. 

Whether you are a partnership, corporation or nonprofit, even owners of the business are considered employees and can therefore make their employee contributions, which gives you wiggle room for larger contributions and greater flexibility overall. This can be a great option for small business owners looking to establish retirement plans that benefit their employees as well as their strategic investing and savings. 

IRAs and Solo 401(k) Plans

If you’ve just started your small business and are financially ready to provide employee retirement plans, that doesn’t mean you shouldn’t still be setting aside money for yourself. You could set up a traditional IRA, Roth IRA or other solo 401(k) plan to contribute to as long as you can.

Here are some key takeaways from example options: 

• Roth IRA: As of 2024, contribution limits are $7,000 or $8,000 if you are older than age 50. You can contribute after-tax dollars and take pre-tax distributions.
• Traditional IRA: Similar to a Roth IRA but with this you contribute pretax dollars and have to pay tax on the distributions. 
• Solo 401(k): Also known as a Self-Employed 401(k) is an option if you don’t have employees. However, you as an individual can contribute as both employer and employee a combined total of $69,000, increasing by $7,500 if you’re age 50 or over.

The Benefits of Retirement Planning

The peace of mind that comes with putting a retirement plan in place is priceless. Getting to that point, however, comes with some nickel-and-diming.

For many business owners, their businesses represent their primary source of income and their legacy. Whether you want to see your business continue to thrive under new leadership or ensure its sale benefits your family or chosen causes, retirement planning gives you the tools to make those dreams a reality.

Here are some key benefits to consider when it comes to retirement planning:

• Financial Independence: One of the primary reasons for retirement planning is ensuring your financial independence. As a business owner, you might pour most of your profits back into the business, often neglecting personal savings. However, a well-structured retirement plan helps you build a financial cushion outside of your business, ensuring you have enough resources to maintain your lifestyle after you retire.
• Creating Business Continuity: Retirement planning is also closely linked to business succession planning. Many business owners envision passing their company on to the next generation or selling it to fund their retirement. By integrating retirement planning with succession planning, you ensure a smooth transition when you determine how you want to transfer ownership, whether through a sale, inheritance or some other means.
• Tax Efficiency: Effective retirement planning helps you manage taxes more efficiently. Business owners have access to various retirement savings options that offer tax advantages, like SEP IRAs, Solo 401(k) plans and defined benefit plans. These accounts allow you to defer taxes on your contributions, reducing your taxable income in the present and providing tax-deferred investment growth.

Final Take To GO: Have an Exit Strategy

The bottom line is that retirement planning is an essential, yet often overlooked, aspect of financial management for business owners. Though it may be years down the road, establishing a business exit strategy should be one of the first steps you take toward formulating your retirement plan.

This small business you own could become one of your largest assets for funding your retirement plans, keeping your options diversified.

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