This week, we are discussing how to better safeguard your personal finances. Yesterday, we discussed the importance of creating an emergency savings plan. Today, we’ll uncover retirement options for the small business owner.
Stacy Willoughby, Financial Advisor for Waddell & Reed says “It’s easy when you are working for a large company to contribute to a retirement plan that they have set up. It doesn’t have to be that different when you are in business for yourself. Actually, you have more choices available to you as the business owner. You can choose the investment company, level of service, and type of retirement plan that works best for you.”
Determining your retirement needs
The type of qualified retirement plan depends on your adjusted gross income, retirement goals, and your business structure. Do you have the right retirement plan for you and your business?
Stacy recommends asking yourself these questions to determine the right retirement plan for your business:
- How is your company structured?
- How many employees do you have?
- Do you have a current retirement plan?
- If you do, what would be considered an improvement?
- What is the main reason that you want a retirement plan?
Specific types of retirement plans
These days, the small business owner has so many great retirement plan options! Stacy discussed with me the following retirement plans for self-employed individuals and small businesses:
- Payroll deduction IRA plan: A payroll deduction IRA plan is a type of arrangement that you can establish to allow you [and any employees you might have] to make payroll deduction contributions to IRAs (traditional or Roth).
- SEP plan: A simplified employee pension (SEP) plan is a tax-deferred retirement savings plan that allows contributions to be made to special IRAs, called SEP-IRAs, according to a specific formula. Generally, any employer with one or more employees can establish a SEP plan (although it is best suited for the self-employed, or a sole proprietor or partner with net business income).
- SIMPLE IRA plan: A SIMPLE IRA plan is a retirement plan for small businesses (generally those with 100 or fewer employees) and self-employed individuals. It is established in the form of employee-owned IRAs. The SIMPLE IRA plan is funded with voluntary employee contributions and mandatory employer contributions.
- 401(k) plan: The 401(k) plan has become increasingly popular for sole proprietors and solely owned corporations. With individual 401(k) plans, the business owner is typically the only participant in the plan and they can make the employer and employee contributions. The appeal of individual 401(k) plans dramatically increased as a result of the Economic Growth and Tax Relief Reconciliation Act of 2001, which (a) increased the maximum deductible profit-sharing contribution from 15 percent to 25 percent, and (b) allowed employee 401(k) deferrals to be deducted separately, in addition to the maximum profit-sharing contribution. These changes allow a much larger deductible contribution than was permitted under prior law.
Dream a little dream…
The purpose of your retirement plan is for you to RETIRE! You do not want to be working your business for the next 92 years of your life. If you plan on retiring, you need to start ensuring your retirement. There is no time like the present.
Tomorrow, we’ll get into business insurance – why it’s important and how to get it.