Successful business owners may have their company finances accounted for down to the last penny. They know what’s coming in to the business and what is going out. When they start to make money and the business begins to flourish, they may feel like they’re set. But the truth is, many times, they’ve never even looked at their personal finances. There’s no plan for retirement. They just assume their business will continue to support them forever. This is dangerous thinking.
As a self-employed entrepreneur, many of these small business owners think they don’t need a retirement plan; or a financial advisor. But the exact opposite is true: You probably need a retirement plan and a financial advisor because you’re a self-employed entrepreneur or small business owner.
Many small business owners pour their own financial resources into their businesses and often go months or years without collecting a salary or saving for retirement, all in an effort to see their businesses succeed. This kind of financial “plan” is not sustainable in the long term. If you put all your nest eggs in one basket and count on selling your business or collecting income from it during your retirement years, what will you do if the business goes under prior to or during your retirement?
- What happens if the business doesn’t continue its success?
- What will happen to the business if something happens to you? What will happen to your family?
- What if you no longer want to work and have dreams of retirement yourself?
These are important questions that can lead to complex answers. So financial planning for small business owners is especially important. And we recommend business owners find a Certified Financial Planner (CFP) to work with. It’s even better if you can find a CFP who is well-established in the area in which you live so they know about local programs you may benefit from that you aren’t aware of.
As someone who is fully invested in themselves, and who is ultimately the one carrying the burden for their financial success, small business owners are in a unique position with regard to financial planning and retirement savings, and likewise, have unique needs and options. For example, business owners have tax advantages and the ability to save considerably higher amounts for retirement than non-business owners.
At Align Wealth Partners, we work with a lot of business owners. Many questions we get from these clients are about the retirement plans and accounts that are best for them. So, here are some things to consider when it comes to financial planning for small business owners specifically.
Don’t put your personal finances on the back burner. Contact Align Wealth Partners to see how we have helped many small business owners plan for retirement.
Also called a solo-401(k) or an individual 401(k), Self-Employed 401(k)s are ideal for many sole proprietors or independent consultants who don’t have any employees (other than a spouse).
The Self-Employed 401(k) plan is similar to the retirement plan you might get as an employee working at a larger company: If you contribute up to $56,000 (in 2019) pre-tax to your account, the savings can be put into in a wide range of investments where they can grow, tax-deferred, until you retire. When you begin taking distributions after you retire, they will be taxed as income.
There are no age restrictions with this type of plan, but to be eligible, you must be a business owner with no employees.
The difference with a self-employed 401(k) is that because a business owner is considered both an employer and an employee, he or she can contribute more money each year than they could otherwise with a traditional 401(k), IRA or other small business retirement account.
Simplified Employee Pension (SEP) IRAs
In a SEP IRA, a small business owner can contribute up to 25 percent, or $56,000 (in 2019) – whichever is less – of his or her income. The SEP IRA offers tax benefits: Contributions are tax deductible, and investments grow tax-deferred until retirement. These accounts are specifically designed for small business owners. Because the IRA account is tethered to the individual, rather than to the business, it can be safeguarded in the event that the business fails.
This type of retirement savings plan can be ideal for people who are self-employed or own small businesses with few employees. The SEP IRA does carry age restrictions: According to the IRS, the SEP IRA contribution age limit is 70-½. When you retire, distributions from your SEP IRA will be taxed as income.
One potential drawback to the SEP IRA is that whatever percentage of your compensation you decide to contribute to your plan, you will have to also contribute an equal percentage to the SEP IRA plans of any participating employees. In other words, as a small business owner, if you designate 10 percent of your salary to your own SEP IRA account, you will also have to contribute 10 percent of your employees’ salaries to their SEP IRA accounts.
Savings Incentive Match Plan for Employees (SIMPLE) IRAs
SIMPLE IRAs are the small-company version of a 401(k). It’s a tax-deferred retirement plan for employers with fewer than 100 employees. It is similar to traditional IRAs in that contributions are made pre-tax, and like a Self-Employed 401(k), there are no age restrictions. You can also match your own employee contributions as an employer, maximizing your savings.
With a SIMPLE IRA, you can save up to $13,000 (in 2019), plus either a 2 percent fixed or 3 percent matching contribution.
SIMPLE IRAs are, like the name suggests, relatively simple accounts to set up, and the employer portion of your contributions vest immediately, so you have 100 percent ownership of the money in your account. Drawbacks include hefty tax penalties for early withdrawals, and the fact that you’re not allowed to take a loan from your retirement savings with a SIMPLE IRA.
Why Find a CFP to Work With
While you’re busy running and growing your business, many business owners don’t have time to worry about the many financial issues that go along with owning a small business, like dealing with risk management, following updates to tax code or understanding the nuanced and evolving options for investments and retirement plans. For example, some of the retirement savings accounts mentioned above have caveats that allow for “catch-up saving,” meaning if you are 50 years old or older, the amounts you are allowed to contribute to certain accounts are slightly higher.
In other words, there’s a lot to consider when it comes to your personal finances.
By delegating these kinds of financial responsibilities to a CFP, you not only relieve yourself of the time, risk and burden of your personal financial planning, but you can also put the job of financing your Golden Years into the hands of an experienced financial professional.
When it comes to financial planning and retirement saving, as a small business owner, it’s not wise to rely on the ambition and DIY spirit that helped make your business successful. Owning a business and planning for retirement as a small business owner comes with all sorts of unique challenges and issues that can be handled by a professional financial advisor. Each of the retirement savings vehicles mentioned above have pros and cons. While one might be just right for a friend, it might not be the best fit for you. A financial advisor can help you sort through your options and make the right decision for you and your business.
Don’t put it off. Find a CFP to work with, and put a plan in place before you can’t. If you’re looking for a financial advisor for the first time or want to find a CFP to replace your current advisor, contact Align Wealth Partners to see how we can help.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal. No strategy assures success or protects against loss. Your individual results may vary.