When you run your own business, you are a master juggler—someone who as Michael Gerber says, “not only works on the business, but in the business.”
Too often, however, business owners get so overwhelmed with growing their company that they neglect personal financial-planning issues.
Why would you want to move the goal of saving for retirement up higher on your priority list?
- Proper retirement planning can enhance the business because it helps you manage risk.
- It also will make you more confident in the daily risks that are essential to your growth.
- A strong financial plan has the potential to make your business more attractive to quality employees.
- Since small business owners and their employees are more responsible today than ever before to save for their own retirement plans, saving plans provide a win-win situation for everyone.
The key is selecting the proper plan for you and your company.
Following are a few options to consider:
- A Traditional IRA is a potentially tax deductible investment account allowing annual contributions up to $5,000 ($6,000 if over 50) that can be invested in stocks, bonds, or mutual funds as well as many other investments tax-deferred. Withdrawals beginning at age 59 ½ are available without early distribution penalties. The money is subject to required minimum distributions (RMD) beginning at age 70 ½. Deductibility depends on family income levels and spousal qualified-plan eligibility if they also work.
- A Roth IRA is similar to a Traditional IRA but the contributions are always after-tax dollars. The growth in the Roth IRA is tax-deferred. Distributions are tax-free if certain conditions are met. For tax-free distributions of growth, both of the following conditions must be met: 1) had a Roth IRA for five years, and 2) one of the following (a) age 59 ½, (b) death © disability (d) first-time home purchase ($10,000 lifetime maximum). A Roth IRA is not subject to required minimum distributions during the owner’s lifetime. Beneficiaries are subject to RMDs. Contributions are limited depending on family income levels.
- A SEP IRA is a Simplified Employee Pension IRA. It allows for a potentially larger contribution capability. Contributions of up to $53,000 are possible in 2016 and indexed for inflation depending on adjusted gross income and business schedule filings. Contributions made by the business owner have contribution requirements for eligible employees that may or may not make this plan a viable option.
- A SIMPLE IRA is a salary incentive matching plan IRA. SIMPLE IRA plans can provide a significant source of income at retirement by allowing employers and employees to set aside money in retirement accounts. SIMPLE IRA plans do not have the start-up and operating costs of a conventional retirement plan like a 401k. The amount the employee contributes to a SIMPLE IRA cannot exceed $12,500 in 2016.
- A 401k Plan is a plan that offers a little more flexibility than a SEP regarding contributions for employees. It allows for up to $50,000 (which includes an additional $5,500 if you are over 50), but is less restrictive when providing contributions in matching formula to employees. This design allows and encourages employees to get involved saving their own money, too.
These are not the only options for retirement saving, but they are the most common. The correct plan for you may be one of these, or something more specialized.
And remember, certain limitations, restrictions, and liabilities come with creating and maintaining a retirement and savings plan for your company, so be sure to consult your tax and investments adviser.