Don’t neglect planning for retirement
As a small business owner, you are responsible for saving for your own retirement.
Although the demands of starting and managing your business in the here and now may dominate your thoughts, planning for the future is crucial. You need to make sure your business cannot only sustain itself, but also your personal financial wellbeing in the years to come.
In planning for retirement, many small business owners make two key mistakes: They don’t plan for it, or they plan to sell the business and use that for their retirement. Many don’t understand their financial statements and end up using all of the cash (assets) in the business, leaving little real value — beyond customer goodwill— in the end. The better way is investing in your own future by having a retirement plan.
The tax law offers an array of taxadvantaged retirement plans for small businesses and their employees. The choice depends on several factors, including how much the business can afford to contribute, the age of the owner and staff, and the administrative hassle.
The options include an SE P IRA (Simplified Employee Pension Plan). It allows self-employed people and small-business owners (as employers) to make contributions to their own and/or each eligible employee’s account on a discretionary basis. Contributions are tax deductible as a business expense.
A SIMPLE IRA( Savings Incentive Match Plan for Employees) is funded by tax-deductible employer contributions and pretax employee (including self-employed sole proprietor) contributions, muchlike a 401(k) plan. It allows eligible employees to contribute part of their pretax compensation to the plan; taxes on the funds are deferred until the money is distributed.
A Self-Employed 401(k) is a taxdeferred retirement plan for selfemployed individuals. With the same rules and requirements as traditional 401(k) plans, it covers business owners with no employees.
Each plan may offer certain tax advantages, such as tax-deferred growth potential, deduction of employer contributions as a business expense, or potential tax credits.
With any retirement plan, you need to estimate how much money you will need to live on after you stop working in your business so you can plan to save enough to meet your goals.
You can compare retirement plan options using IRS Publication 3998, Choosing a Retirement Solution for Your Small Business, which can be found at www.irs.gov/Forms-&Pubs. Also consider talking with a financial planning professional.