How can business owners save for retirement?
Our firm works with many business owners, helping to manage both their personal wealth as well as consulting and advising them on how to best save for retirement through their company retirement plans. Whether you are starting a business or setting up a new retirement plan for your business, it’s important to understand and decide which type of retirement plan is right for you and the future growth of your business.
Business owners tend to be both entrepreneurial and risk takers as they put a lot, if not all, on the line to fund their business. Since starting and operat- ing a business can take up significant amounts of capital, business owners wind up being less likely to save for retirement than the average worker. A recent survey* showed only 36% of self-employed individuals are saving towards retirement vs. 54% who work for an employer. Liquidity needs, less income when starting a business, or for some the idea that retirement plans are costly and time-consuming could deter a business owner from starting and funding a retirement plan. The great thing about retirement plans for business owners is that many of them are easy to set up. A SEP or SIMPLE IRA can be established in under 30 minutes with little regulation and filing requirements after that, especially for a sole proprietor. The SEP IRA is great in that it allows the business owner to put up to $54,000 away tax-free, however if you have employees the owner will be required to contribute equally to their SEP IRA’s as well. A SIMPLE IRA doesn’t require the owner to fully fund their employees plan, however it limits your savings to $12,500 per year.
A 401(k) plan may be more expensive due to ERISA regulations and annual filing requirements, but you can find cost-effective ways to establish a small or solo 401(k) up front. As time goes on and your business grows, the 401(k) plan can be used as a recruiting tool as you hire additional employees. The 401(k) for 2017 also allows a business owner to put away $54,000 of pre-tax savings and gives you flexibility depending on whether or not you would like to contribute for your employees in the form of safe-harbor matches or profit sharing
contributions. For the business owner who is looking to defer more than the $54,000 these plans allow for, there is always the option to create a Defined Benefit, or self-funded pension plan, as well. This plan works best for an owner who has steady cash flow and an established business as it allows for even greater deferrals, but less access to those funds. I’ve worked with clients who are eligible to put hundreds of thousands of pre-tax earnings away, knowing they won’t need it until retirement and the business can survive as is without needing the extra liquidity. This type of plan could accompany a 401(k) plan for maximum tax-savings in the right situation.
Just as every business is
unique, each business owner’s retirement needs are unique as well. There are plenty of retirement plan options out there so if you are starting a business or would like to fund a retirement plan, consult with a professional to find the right plan for you.
Ryan Bouchey CFP, CPA is Vice-President of Bouchey Financial Group, Ltd. with offices in Saratoga Springs and historic Downtown Troy. E-mail investment and financial planning questions to planningpaysoff@bouchey.com. Information contained in this column should not be considered as the receipt of personalized financial advice and please consult with your financial adviser.