Reflections

How Business Owners Can Catch Up For Retirement

70% of the wealth of small business owners is tied up in their business, yet 34% don’t have a retirement savings plan.

darts Owning your own business can give you great freedom and power in life, but it also comes with responsibility. One of the responsibilities business owners struggle with is creating a plan to convert their successful business into long-lasting personal wealth.  As a business owner, you know how difficult it is to prioritize saving for retirement when you are focused on growing your business. For most small business owners, 70% of their wealth is tied up in their business[1] and according to a Manta research study, 34% of business owners don’t have a retirement savings plan.[2]  Since your retirement is just as important as the success of your business, take a look at these four steps that will help you catch up for retirement in a hurry.

1. Find the Right Plan For You

Unfortunately, you don’t have access to an employer-sponsored 401(k) account with matching contributions at your fingertips. That doesn’t mean you are out of luck when it comes to building a nest egg. Here are some savings options to consider.

Traditional & Roth IRA

A Traditional IRA is like a 401(k) in that you can contribute pre-tax dollars to an investment account that grows tax-deferred. A Roth IRA is the reverse: your contributions are not tax-deductible like Traditional IRAs; instead your earnings grow tax-deferred and your withdrawals are all tax-free (subject to IRS guidelines).  For 2019, you can contribute up to $6,000 to IRAs, or if you’re over age 50, a total of $7,000.  There are income limits to these strategies, however, so higher earners may have to get more creative to take advantage.

SEP IRA

A SEP IRA, also known as a Simplified Employee Pension, is a good option for those seeking a retirement plan with higher annual limits than the $6,000 ceiling imposed on IRAs, but without the administrative responsibilities of a 401(k).  As an employer of yourself, you can make contributions on your own behalf of up to 25% of your self-employed income or $56,000 per year (whichever is the greater amount).  Perhaps the most attractive feature of a SEP IRA is that annual contributions are completely discretionary: a business owner can provide a maximum $56,000 contribution one year and no contribution the following year if business is slow.

Solo 401(k)

A Solo 401(k)is ideal for business owners with no employees (other than a spouse).  It can offer an advantage over the SEP IRA because it allows you to contribute in two separate capacities: both as an employee and as an employer. Wearing your employee hat, you can defer up to $19,000 (or $25,000 if age 50 or older). As the employer, you can also contribute up to 25% of compensation as defined by the plan. Combined, you can contribute up to $62,000 if you’re over the age of 50.  If you earn $225,000 or less a solo 401(k) will generally allow you to contribute more than a SEP IRA.

Adding A Defined Benefits Plan

A defined benefit plan such as a cash balance plan will allow you the greatest amount of tax-deferred retirement savings.  They are such a powerful retirement savings tool, we even made a video explaining how they work.   These plans are complex but can be designed to fit the needs of almost any business. Depending on your age and income, a defined benefit plan allows you to set aside up to hundreds of thousands of dollars annually to fund your retirement, making it possible to save a lot, even if you have little time.

2. Banish Debt

The less debt you have when you enter retirement, the better. Whether it’s personal debt in the form of credit cards, car loans, or a mortgage, or business debt in the form of bank loans or equipment purchases, reducing your debt before retiring will lower your monthly expenses and enable your savings to grow and last longer. Review all current debts you face and compare interest rates and balances. This can help you decide which to pay off first.

3. Planning for a Profitable Exit

Do you have an exit plan? Even if you are just in the beginning stages of your business, it’s imperative to have a plan for the future of your company because it will likely become one of your largest assets. Around 78% of small business owners plan to sell their businesses to fund their retirement, with the sale profits funding 60% of their retirement needs.[3]

If you are heavily relying on the sale or succession of your business to take care of your future financial needs, it’s critical that you start thinking about what you can do now to prepare so you receive the highest price possible. Having a strategic transition plan will make your company more appealing to buyers who want assurance that it will continue to thrive without you. A thorough understanding of tax ramifications of selling your business can save you millions. Even if you’re passing the business on to family members, you need a plan in place to ensure that it continues to prosper and all family members are treated equally.

4. Build A Support Team

It’s no secret that being a business owner complicates life and finances. On top of saving for retirement and taking care of your family, you may also have employees to think about and tax considerations. You are in a unique situation and would benefit from working with someone who specializes in serving business owners.

At Windgate Wealth Management, we specialize in serving small business owners and providing unique services to take care of all their financial needs. We even help design and manage company retirement plans, including 401(k)s, cash balance plans, and SEP IRAs, to help you provide for your employees, grow your personal wealth, and reduce your tax liability.

To learn more about how we can help you catch up for retirement quickly, call (844) 377-4963 or email windgate@windgatewealth.com. You can also book an appointment online here.

[1]https://www.cnbc.com/2014/08/19/cnbcfinancial-planning-association-survey-finds-small-business-owners-are-too-focused-on-their-business-to-plan-for-their-own-financial-futures.html

[2]https://www.manta.com/resources/small-business-trends/small-business-retirement-savings-plan/?dest=%2Fresources%2Fsmall-business-trends%2Fsmall-business-retirement-savings-plan%2F

[3]https://www.cnbc.com/2015/04/13/ew-small-biz-have-an-exit-plan.html

Perritt Capital Management, Inc. is the Registered Investment Advisor for Windgate Wealth Management accounts and does not provide tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation.

Windgate Wealth is not responsible for, and expressly disclaims all liability for reliance on any information contained in these third party sites.  No guarantee that information provided in these sites is correct, complete, and up-to-date.

Data here is obtained from what are considered reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed.

First published April 2019.

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