Saving for Retirement as a Small Business Owner

Saving for Retirement as a Small Business Owner

December 11 2017

Business owners spend so much time focusing on the growth of their companies that they often neglect to save for retirement until it's too late. 

According to a 2016 BMO Wealth Management survey of 400 small business owners, 75% of owners between 18 and 64 have saved less than $100,000 for retirement. Even more alarming is that of owners between 45 and 64, a staggering 68% have saved less than $100k.

Many business owners believe that their business is their retirement plan -- they expect to pass it on to a family member for a share of the profits or sell the business which will then fund their retirement. Yet, according to the Exit Planning Institute, 70-80% of businesses on the market don't sell. And only 30% of all family-owned businesses survive into the second generation.

But what happens if the business fails? If that happens, what is the contingency plan? For most, it's to work longer, but depending on their health and various external circumstances, that may not be an option.

Here are four retirement plans perfect for small business owners:

SEP-IRA: SEP stands for Simplified Employee Pension. A tax-deductible retirement plan similar to a traditional IRA. These are ideal if you are the only employee. You can contribute up to 25% of your compensation or $54,000 for 2017 ($55,000 for 2018). It's important to note that if you have employees, you will also need to fund SEP-IRAs for them.

Simple IRA: these are plans for owners with 100 or fewer employees. Contributions are pre-tax and taken directly out of employee paychecks, like a 401(k). Your contribution cannot exceed $12,500 in 2017 and $15,500 if you're 50 or older.

Solo 401(k): a plan for self-employed people without employees (except a spouse may qualify). The IRS will allow you to contribute this year, pre-tax, up to 25% of your compensation plus an employee's contribution of up to $18,000 ($24,000 if you're 50 or older). The total contribution cannot exceed $54,000. If your spouse works with you, they can also put in the same amounts.

Simple 401(k): for businesses with 100 or fewer employees. You and your employees can contribute up to #12,500 for 2017; $15,500 for people 50 or older. You and your employees may borrow against the money in your 401(k) accounts and withdrawals due to financial hardship without incurring a penalty.

Not only can it give you peace of mind, saving for retirement can also help you save on your income tax bill. Your CPA or accountant can help you make sure that not only are you maximizing your contributions to your plan, but also making sure you've maximized your tax savings. 

Being a business owner isn't easy. You've worked hard to build a company you love; make sure you can enjoy the results when it's time to retire.


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