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Retirement Plans for the Small Business Owner

small business owner

Want to sell your business for $1billion?

 

At the heart of the small business owner is the hope that someone will come along and buy his business for exactly the right amount of money to retire to the Caribbean.  Just in case that doesn’t pan out, how you will support yourself when your business no longer does?

 

You need to save for retirement.  Every year.  Unglamorous, but your 65-year-old self will thank you.  And, your lower-income-tax-paying self today will be happy, too.

How to do it?

Individual Retirement Account (IRA): 

These can be used by anybody with earned income. The money you put into a Traditional IRA can be deducted from your income taxes if you don’t have access to a workplace retirement plan and fall under certain income thresholds.

 

The growth is tax-deferred, meaning you don’t pay taxes on the earnings of the account until you withdraw at retirement when taxes are owed at the rate of your taxes in retirement.  The maximum amount you can put in each year is $5,500 and you have until April 15th following the tax filing year to contribute.  Anywhere that handles money (your bank, credit union, brokerage company) will open an IRA for you.

 

A variation is the Roth IRA where you contribute up to $5,500/year, but do NOT take a tax deduction for the contribution.  Why bother?  Tax-FREE growth!  When you take the money out at retirement, you don’t owe any taxes withdrawal.

 

SEP IRA: 

This IRA is meant for small businesses. You can deposit 25% of compensation to a max of $54,000 in 2017.  The contribution is deductible from your taxes and the growth is tax-deferred like a Traditional IRA.

 

The catch is that you must put the same percentage of compensation for any eligible employees as you do yourself.   Accounts must be set up and funded by April 15th of the year following the tax year for which you are contributing.

 

Self-Employed 401(k): 

This is account is available only to small business owners who have no employees other than their spouse.  The SE 401(k) allows you to put 100% of compensation up to $18,000 ($24,000 if you are age 50 +) plus 25% of eligible compensation as a profit-sharing match.  The contributions are pre-tax and the growth is tax-deferred.  The maximum dollar amount allowed is $54,000 for 2017.

 

This plan allows those with less net income to put more away than a SEP IRA.  The plan must be established by December 31st of the tax year the contribution is for, but can be funded up until April 15th of the following year.

 

Simple IRA: 

These accounts let businesses with less than 100 employees open a low-cost retirement plan where employees can contribute their own money.  You are required to offer a small match for contributing employees, but it’s not as much as the SEP IRA.  The maximum employee contribution is $12,500 for 2017.

 

Please, do not take this as personal tax advice.  Consult your CPA before deciding which plan is right for you.