A practical Guide to Retirement Planning for Small Business Owners

You have put your heart, soul and most of your money into your startup, and nothing you envision could make you walk away from its success. But, no matter how much you love your company, no matter how passionate you are about your products or services; there will come a time when the prospect of retirement begins to look really attractive. Unlike your employees, you may not have given much thought to retirement planning. In fact, a recent survey showed that as many as 70% of self-employed individuals aren’t adequately saving for retirement, and 28% have no retirement plan at all. No matter how lucrative your company becomes, it’s on you to come up with a retirement nest-egg for yourself as a hedge against an unknown economic future.

Retirement Plans for Business Owners

Unless you have fewer than five employees, you should have set up some sort of retirement fund that they can buy into (there are tax advantages for your business, and it will help you attract and retain a better caliber of workers), which you can also benefit from as an employee of your business who’s drawing a salary. If you’re a self-employed service provider, and you’re the only employee of your business, there are still quite a few options for building a retirement fund. Here are a few of the better ones.

1. Simplified Employee Pension (SEP)

SEP is similar to a traditional IRA, but it’s designed especially for self-employed individuals. Under this plan, you can up to 25% of your current income or use the IRS maximum contribution, whichever is lower. You simply need to find a bank that offers this option and fill out the IRS form 5305-SEP to set it up. There are no tax filing requirements with this plan, and it costs next to nothing to administer.

2. Profit-Sharing

Profit sharing is an often overlooked option when it comes to the self-employed. If you have enough employees to benefit from establishing a profit-sharing plan, you can also take advantage of the set-aside as an employee of the company. The difference between this and the dividend you would receive as a traditional employee is that you would base it on a percentage of your company’s earnings instead of your individual income. It would still require setup and administration through a bank or other financial institution, but it would force you to set-aside a larger share for your retirement, as well as keeping your employees personally invested in the success of your business.

3. One-Participant 401(k) Plan

Like an SEP, this is similar to the traditional model, with a few exceptions. First of all, you would double dip as both an employer and an employee, increasing the amount of your personal retirement fund. You would also reap the tax benefits and incentives as the company owner. The table available in IRS Publication 560 will tell you your contribution limits as well as providing other important information.

Your business accountant, the IRS and financial planning companies like Fisher Investments can provide information or retirement planning services that can be tailored to your circumstances. Whether you choose to receive counsel from a professional at a company like FI or you check out any of the many online resources, it helps to get some help to secure your financial future. It’s estimated that you will need about 70 – 90% of your current income to retain your living standards after retirement, so the sooner you come up with a plan the better.