Business Owners Should Factor Retirement Into Their Financial Planning

Financial and strategic planning that can help small business owners save for retirement

As business owners and entrepreneurs, you may want to reinvest profits back into your business. However, don’t forget about your personal retirement planning.

Entrepreneurs and business owners who are baby boomers (over the age of 50) are not well prepared for retirement, according to a Small Business Administration report, Retirement, Recessions, and Older Small Business Owners. Starting and sticking to a retirement plan for yourself and your enterprise should be part of your financial and strategic planning for your business.

As a wealth strategist, I’ve seen firsthand how business owners and the self-employed need to approach retirement in a different way than the traditional employee. If you are on your own or your business only has a few employees, you have options to consider that can also help you save money on taxes. Here are some to consider:

1. Traditional IRA

Many account providers require an initial investment to open an IRA account. Once opened, the maximum yearly contribution for 2016 is $5,500, or $6,500 if you are over the age of 50. Your traditional IRA contributions may be tax-deductible. But, the deduction may be limited if you or your spouse are covered by a retirement plan at work, and your income exceeds certain levels. Distributions from your traditional IRA will be taxed as ordinary income and will be subject to a tax penalty of 10% if withdrawals are made before you turn 59½, with certain exceptions.

2. Roth IRA

This can be used when contributions do not receive a tax deduction. Instead, the Roth IRA option, which has the same maximum yearly contribution limits as a traditional IRA, allows you to take tax-free withdrawals after the age of 59½ after a minimum five-year enrollment period has passed. As with the Traditional IRA, if withdrawals from the Roth IRA are made before you turn 59½, you are subject to a tax penalty of 10% with certain exceptions.

3. Savings Incentive Match Plan for Employees (SIMPLE) IRA

This plan is for people who are self-employed or own their own business and offers the ability to make contributions by deferring salary or pre-tax contributions. Net earnings from self-employment can be placed in a Simple IRA up to a maximum contribution of $12,500 for 2016 (plus a catch-up contribution of $3,000 if you’re over the age of 50).

4. Simplified Employee Pension (SEP) IRA

This plan is similar to an IRA or Roth IRA, and may be the easiest retirement plan for a small business owner to establish and maintain. To qualify, you need a legally registered business. Contribution limits are 25% of your compensation or less than $53,000 for 2016.

5. One-Participant 401(k)

This is also called Individual 401(k), Solo 401(k), or Uni-K. This retirement account option is for self-employed business owners who do not have any employees working for them, and have legally registered their business.

In addition to these retirement plan options, other options also are available, such as defined benefit plans and even non-tax qualified retirement savings strategies. Besides being able to save more for retirement, the pre-tax benefits of retirement plans will help you save money.

Investing for retirement takes a little more work when you’re running your own enterprise. Be sure to talk with your wealth advisor about the options you have available in your situation, so you can take advantage of the most appropriate plan for your retirement.

John Campbell is a wealth strategist for The Private Client Reserve of U.S. Bank, Chicago, and works with business owners, CEOs, and high net worth individuals. He has a B.A. from Yale University and a J.D. from Tulane Law School.



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