Retirement Planning Advice for Business Owners
Owning your own business has a lot of benefits – not answering to a boss, setting your own schedule, benefiting financially from your hard work. The one thing most entrepreneurs don't have, though, is a good retirement plan.
Even if you are fairly close to retirement and believe you have a pretty good idea of your company's value, a host of factors ̶ changing economic conditions, new competition in your market, other unknowns ̶ can make it difficult to know what your business will be worth when you're ready to step down. That's why the New York State Society of CPAs advises self-employed business owners to set up a retirement account that will provide them with a reliable nest egg.
There are many tax-advantaged options that can help maximize the value of your savings. The CPAs explain a few savings vehicles for self-employed workers.
SEP IRA and SIMPLE IRA: These are two well-known, long-standing options. The Simplified Employee Pension (SEP) IRA is available to sole proprietors, partnerships and corporations. If self-employed, you can contribute as much as 20 percent (though no more than $49,000) of your net business profit each year. If incorporated, you can contribute 25 percent of compensation or $49,000, whichever is less. Net business profit is defined as the income of the business after expenses, and minus half of the self-employment tax.
SEP IRAs can be opened through a bank or other financial institution and are relatively easy to establish. You can make a contribution each year as late as the due date for your income tax return, including extensions.
In a Savings Incentive Match Plan for Employees (SIMPLE) IRA, you can set aside up to $11,500 of your self-employment earnings (plus an additional $2,500 if you’re 50 or older). SIMPLE IRAs are generally good options for small businesses that want to avoid the often high costs of setting up and maintaining a traditional company retirement plan for their employees. The employer is required to chip in either a contribution that matches up to 3 percent of employee compensation or a 2 percent contribution for each employee.
Solo 401(k): There is another option, known as the solo or individual 401(k), open to business owners with no employees. As an employee of the business, you are allowed to contribute all your earned income, up to the annual contribution limit of $16,500, or $22,000 if you are at least 50 years old, as long as those amounts don't exceed your salary. As their own employers, the self-employed also can contribute up to 20 percent of the net business profit, to a maximum of $49,000 (or $54,500 for those 50 and older).
Because you have several savings options, you can choose the type of tax advantages that work best for you. With a SEP or SIMPLE IRA or what can be called the traditional model of the solo 401(k), your initial contributions are deducted from your pretax income. You do not pay taxes on that income now, but you do pay taxes on your withdrawals in retirement. With a Roth solo 401(k), your current contributions are not deducted from your pretax income, but your withdrawals from the account upon retirement may be tax-free. With all these choices, the investment earnings on your contributions are tax-free until retirement.
Your accountant can offer advice on a wide range of business questions, including which retirement-plan option best suits your need. And to get a sense of the many ways in which certified public accountants can help small businesses, you can visit the American Institute of CPAs' 360 Degrees of Financial Literacy site dedicated to small-business needs.
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