Business owners and gig economy workers may enjoy their freedom and often benefit from more flexibility. But, they miss out on the retirement plans and contributions that many full-time workers receive. So, how should a small business owner plan for retirement in the absence of company-sponsored plans? (Dallas Tax Advisor: Retiring As a Business Owner)
What is the biggest challenge for business owners and retirement?
In short, a lack of info. Many businesses operate with no HR department. The owners may be allocating their budget right back in the business, failing to set aside funds for retirement plans or a financial consultant. Sure, you get to call your own shots, but you don’t know what you don’t know. This is where many small business owners take their biggest misstep: They either fail to invest in a retirement strategy or make critical mistakes on the front end that could cost them in fees and taxes in the long run.
What is a SEP IRA?
First, consider opening a SEP IRA, shorthand for simplified employee pension plan. These plans allow you to pack away a lot more money than traditional IRAs do. The amount of money you can put into your SEP is based on your earnings. Whereas with a traditional IRA, you can only put in $6,000 if you’re under age 50 (for 2019), you can do up to $56,000 or 25% of your earnings – whichever is less – with a SEP.
A SEP is also highly desirable because it’s easy to achieve. You don’t need a third-party administrator; you can open a SEP IRA and start saving immediately.”
But note: only the employer contributes. If you’re a business of one – say, a freelancer – this is a no-brainer. However, if you’re a business with 10 employees, your contribution rate must be the same for all employees, and you’re the only contributor to the account; your employees cannot contribute. This is where things can get more complicated, and it’s highly recommended to hire a plan administrator.
What is a solo 401(k)?
The solo 401(k) is also known as a one-participant 401(k). This 401(k) plan is only inventive in that it’s for a business of one. With the solo 401(k), you get to make contributions to the account from both roles – as an employer and employee. You can contribute elective deferrals up to $19,000 for 2019 ($25,000 for age 50 or older), as well as 25% of compensation for employer contributions, maxing out at $56,000 per year. For a single, self-employed individual, you must calculate how much you can contribute, but you’ll typically benefit far more than you would from a SEP IRA, saving much more money and significantly reducing your tax liability.
Is a traditional 401(k) right for your business?
A traditional 401(k) is appealing – you can make employee deferrals, plus anyone over age 50 can play catch-up with additional contribution allowances. However, before going this route, consider what will benefit your employee base most. Do they understand the benefits of a 401(k), and are they willing to contribute? Is this a benefit they want?
Some businesses may want to consider a safe harbor 401(k) plan. These plans are designed to ensure that no employee is discriminated against. Safe harbor plans do not have to undergo the annual nondiscrimination tests, usually required by law, that evaluate how employees of various compensation levels use your 401(k) plans.
Hire a professional (it’s worth the investment).
Just like your business, retirement plans can be more complex than they appear. Hiring a CPA and a third-party administrator is a smart investment in the longevity of your business.
It’s a good idea to find someone from a referral. Find someone who has had many years of experience.
It’s not uncommon to see business owners want to save the money they would spend on a retirement strategy and use it for other things – including putting it back into the business. But should spend the some money on an experienced advisor who is trustworthy and who will support your business as you grow.
Experienced professionals can advise you on your unique situation and goals, and construct a strategy for you based on a variety of plans.
Don’t bank on selling your business for a retirement strategy.
Business owners often think that selling their business will set the foundation for their retirement plan. This can become especially complicated in family-owned and -operated businesses, as the direction of the company can get a bit tricky with so many passionate owners involved.
The idea of selling your business when you retire is great in theory. But you are likely not going to get the value out of it that you are hoping for. If you do, great. But planning for it is not a great exit plan. You don’t want to play games with retirement.
But how much is enough for retirement?
There is no one-size-fits-all. It’s not like typical budgeting. Everyone has a different time horizon and risk tolerance and lifestyle. Each of these factors matters.
Retirement is personal. Business owners must also take other things into account, such as their desires to possibly hold another job in their later years, travel, time with family, health concerns and so on.
The millionaire next door is real. There are clients who retire early, who earned a modest income throughout their careers. They just made wise choices and investments. And now they can securely retire for a modest amount per month. It’s amazing to see.
Call Williams & Kunkel CPA today in Flower Mound at 972-446-1040 to have a chat and find out how you can save money on your taxes as a real estate professional.
Source: Business News Daily