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Top Retirement Funding Options for Small Business Owners

By Chad Chandler | | 0

retirement_fundingAs a small business owner, it's up to you to plan for your retirement's funding. There's no employer there for you to fall back on here for business owner retirement funding help. Additionally, if you have employees, you're also responsible for helping them plan for their retirement as well. With this in mind, here are some things you must consider.

Develop Your Exit Strategy

It seems strange that the first thing you must do is develop your exit strategy, but when you spend your entire life building a business, it becomes your largest asset. As such, you must liquidate your business when it's time to fund your retirement and stop working.

In preparation for selling your business in the future, you must enable it to operate without you. It's never too early to begin thinking of this. Your initial goal here is finding someone who can run your business and would want to do so. They need to have good credit so they can buy the business. This person could be a partner, competitor, relative, or an employee. Also, consider whether you want to retain a partial stake in your business once you sell it or if you're prepared to completely wash your hands of it all.

One of the main things affecting the sale of your business are market conditions. Since you want to sell your business for top dollar, build some flexibility into your retirement plan so you can sell your business when the economy is best. Regardless what you do, avoid a distress sell, which is what happens when you wait to the last-minute to sell your business so you can retire. According to the Guardian Insurance and Annuity Company, about 35% of small business owners depend on the income from selling their business to fund their retirement, but only 17% had identified potential buyers.

Choose Your Retirement Strategy

There are also some ways you can use your small business now for funding your retirement later, including:

  • A SIMPLE IRA: A tax-deferred retirement plan allowing you to set aside up to $12,500 per year (pre-tax) while you're still working or up to $15,500 once you're 5-years-old or older so you can fund your retirement
  • A SEP IRA (simplified employee pension): A variation of the SIMPLE IRA, but you can also provide this for your employees too as long as the amount contributed to these accounts is all equal. As of 2015, you can contribute up to 25% of your income (up to $53,000).
  • IRAs and Solo 401(k)s: When working in a competitive industry and desire to attract the best talent, you'll need to offer a retirement plan like one of these. Of course, you don't have to offer them one, but it does help. Essentially a Solo 401(k) is a retirement funding plan for self-employed people and sole employees. Depending on whether you have an elective (you don't have to contribute) or non-elective (you have to contribute according to the plan) IRA you can defer up to $15,000 of your pre-taxed income to your IRA. Once you turn 50-years-old you can contribute up to $53,000 per year.
  • A Roth IRA or traditional IRA: When you have one of these IRAs you (or anyone else) can contribute to this account. With a Roth IRA you can contribute after-tax dollars, taking a tax-free distribution once you retire. However, with a traditional IRA you're taxed. You can contribute up to $5,500 per year then when you turn 50-years-old you can contribute $6,500.

In 2014 about a third of business owners said they didn't want to retire, another quarter don't plan on retiring, and over a third said they'll spend their golden years divided between working and leisure. Nonetheless, you still need a retirement plan so you'll have options that leave you feeling satisfied. If you need some help planning for your retirement, contact us. We're happy to help!

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Posted in Financial Planning, Small Business, Tax Free Retirement Planning

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Chandler & Knowles CPAs is dedicated to serving our clients with an integrated approach to financial success for businesses, families and individuals. Our knowledgable team is committed to providing you with the most detailed information to answer your biggest financial questions and to help make your life less taxing.

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