Retirement Options for Small Business Owners

By John Shrewsbury, RICP

Special to Financial Independence Hub

As a small business owner who is emotionally, physically, mentally, and financially engaged in a growing startup, you may feel consumed in the now. So many small business owners put everything back into their company without setting aside their profits in a tax-efficient way. If you run your business without an eye to the future, you will never reach the point where work becomes optional. Your business is your vehicle to financial independence, but it won’t happen without years of careful preparation.  

The independence and freedom of your entrepreneurial path comes with an array of responsibilities. As the business owner, the weight of preparing for your retirement and the retirement of your employees falls entirely on your shoulders. After all, if you don’t plan for your retirement, who will? Start building retirement savings into your company budget and making it a part of your compensation for running the company.

Business owners in the U.S. have retirement options for many situations

As a small business owner, you have a retirement option for almost every situation. When choosing a plan, your most significant consideration is the cost of contributing. If you can only afford to set aside a small amount of money each year, an individual retirement account (IRA) will serve you well. 

A Simplified Employee Pension plan (SEP) is the equivalent of a jumbo IRA. This plan works best for self-employed entrepreneurs with few or no employees. You can contribute up to 25% of your compensation to a SEP, with a maximum of $61,000 per year allowable in 2022. Keep in mind that if you have eligible employees, an SEP requires you to contribute an equal percentage of their salaries to the percentage you contribute from your own revenue. For example, a business owner with an employee making $100,000 per year would have to contribute 25% of the employee’s salary if they want to maximize their own contribution at 25%. If you have a number of employees, a SEP will most likely be your most expensive option. 

Simple IRAs offer a slimmed-down version of a 401k for employers with 100 employees or less. This plan allows your employees to contribute up to $14,000 of their salary toward retirement each year. As the employer, you can either match up to 3% of their contributions dollar-to-dollar or contribute 2% of their compensation whether they put money into the plan or not. If you have several employees to consider, the Simple IRA could prove to be the most economical. 

Of course, the traditional 401(k) is available to businesses of all sizes, but it comes with administrative costs and complex regulations. Its flexibility in allowing employees to contribute to a wide variety of investments could point you in this direction.

The importance of educating yourself as an entrepreneur planning for retirement

As a small business owner, don’t neglect to educate yourself early about retirement plans and how to maximize your tax incentives after you’ve chosen your plan. Your tax benefits are of secondary importance to the actual retirement benefits, but don’t overlook them; you can deduct the cost of a plan and the cost of your contributions as ordinary business expenses. The contributions you make for yourself have the potential to reduce your taxable income.

When looking to your future, one of the most crucial areas to educate yourself involves your exit strategy. Financially, think of your retirement as your “financial independence.” We define this independence as having enough income from your investments to provide for your living expenses and lifestyle expenditures. Like many, you may not be interested in a life without work at present, but you should nevertheless be working toward a financial position where work is optional. 

Begin laying the groundwork for succession at least 5 to 10 years before you plan to exit. You will need to consider whether you want to build an enduring business that will continue long after you leave, or if you prefer to sell the business in the future. Preparing to sell a business involves a variety of financial moves, including debt reduction, tax considerations, and vetting prospective buyers. Your successors must have the financial capacity to buy the business and the savvy to run it well once they acquire it. Often, a business’s purchase is funded out of its future profits, meaning that if the new owner fails, you could be hurt financially.

The biggest benefit you can offer your employees is extensive education on how to maximize the plan you make available. Too many times, employee education resembles handing a teenager the keys to the family car and telling them, “Read this owner’s manual and hit the road.” No matter what plan you provide, your employees will only succeed on their retirement planning journeys if they understand concepts like diversification, dollar-cost averaging, and “paying yourself first.”

No business owner should ever let complex retirement plans deter you from planning ahead. Work with a team of advisors to put a plan in place that secures financial independence. Then, engage those advisors to educate you and your staff about the best ways to maximize the benefits of that plan.

John Shrewsbury, RICP, is Co-Owner & Financial Advisor for GenWealth Financial Advisors. A career in broadcasting became the foundation for John’s ability to communicate complex topics in a simple, understandable way. Today, that ability allows GenWealth to deliver financial advice in a clearly defined style. Born and raised in El Dorado, John and his family moved to Central Arkansas in 1996 to build what is now GenWealth Financial Advisors. John has been helping Arkansans to develop their financial programs and plans for retirement for over two decades. He is the Co-owner and Managing Principal of the firm.

John and his wife, Debbie, live in Benton. Their adult children, Sean and Abby, both work at GenWealth Financial Advisors; Sean is the Director of Marketing, and Abby is a Marketing and Social Media Associate.  John’s favorite pastime is cheering the Razorbacks on to victory. No matter whether it is football, basketball, or baseball, he’s always calling those Hogs!

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