If you’re among the nation’s more than 31 million small business owners (U.S. Small Business Administration, “2020 Small Business Profile”), chances are you spend a lot of your time juggling the daily activities of your business. By dealing with the here and now, it can be easy to put off planning for the future.
If retirement planning has taken a backseat, it’s time to bring it to the fore. As a small business owner, you face a different world of retirement plans than someone who’s more conventionally employed, so it’s even more important to closely explore your options when deciding what’s best for you.
Self-employed individuals or business owners should make sure they fund IRAs as much as possible. In 2021, the annual limit for 2021 is $6,000 ($7,000 for age 50 and older). Funding IRAs is just a starting point. Here are some other options for business owners to consider:
This leg of the traditional 401(k) plan can be established if you, or you and your spouse, are the only employees of your business. It offers the possibility of directing the highest potential annual contribution. Up to $58,000 can be reserved in 2021 ($62,500 for seniors 50 and older). This comes from a combination of employer and employee contributions. There are initial costs and efforts required to start and maintain the plan, as it requires a plan administrator. Earnings grow tax-deferred and contributions made by an incorporated business can be deducted from business expenses. For unincorporated businesses, the owner can deduct the contributions from his or her personal income. For those with employees, a full 401(k) plan can be established, although different rules will apply.
This is very similar in structure to Solo 401(k) with two main exceptions. The costs are minimal since it does not require the support of a plan administrator and can cover employees. In this plan, the employer makes all contributions equal to no more than 25 percent of compensation or a maximum of $58,000 in 2021. The employer can determine what percentage of compensation to set aside each year, but it must be consistent for all employees. , including the owner.
If your business can continue to operate successfully without you, then it should have value when it comes time to retire. Ideally, planning for any type of business transition should begin years before a sale occurs. Selling your business to a current employee may be an option to consider, or you may want to look into potential outside buyers.
These plans allow businesses with fewer than 100 employees to set up a SIMPLE IRA or SIMPLE 401k for each employee. Employees can make salary deferral contributions of up to $13,500 ($16,500 for those age 50 and older) in 2021. Employers are required to provide a SIMPLE 401ks matching contribution of three percent of compensation for employees who chose to defer or two percent for employees who do not opt out of making contributions.
Your business as a retirement asset
Of course, monetizing the value of your business can be another way to finance your retirement. If your business can continue to operate successfully without you, then it should have value when it comes time to retire. Ideally, planning for any type of business transition should begin years before a sale occurs. Selling your business to a current employee may be an option to consider, or you may want to look into potential outside buyers. As a business owner, you have unique challenges and opportunities when it comes to planning for a successful retirement. Talk to a financial advisor about how to implement a strategy to ensure your long-term financial security.
Bronwyn L. Martin is a Financial Advisor and Certified Financial Consultant with Martin’s Financial Consulting Group, a financial advisory practice of Ameriprise Financial Services Inc. in Kennett Square and Havre de Grace, Maryland. She specializes in fee-based financial planning and asset management strategies. and has been in practice for over 21 years. To contact her, visit www.ameripriseadvisors.com/bronwyn.x.martin