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As a business owner, your professional life is consumed with the daily tasks of growing and operating your business. You work hard because you realize the importance of providing for yourself and your loved ones – today and well into the future. And that means continually investing time and money into the business.
While growing your business is important, it’s also crucial to create value outside the business. Someday you’ll want to retire, sell the company or pass it on to a family member or business partner. If your net worth is completely tied up in the business – and you’ve put little or nothing aside in a retirement account – you could face some challenges.
To begin, you may need to sell the company to monetize it, but that’s assuming it’s in a position to be sold. Or, you could continue to work into your retirement years, but there’s a chance your family may not realize the value of your company when you pass. Many business owners mistakenly rely on the value of their business to fund their retirement, but they never stop to consider if it has salable value or what needs to be done to achieve a successful sale.
Rather than depending on the sale of your business to fund your retirement needs, take control of your retirement by saving outside the business. Think of it as a form of diversification. Just as you wouldn’t invest all your personal money in one area, you generally shouldn’t have all your money tied up in a business that you may or may not be able to sell.
With that in mind, let’s look at some options.
Owner-only 401(k) – This is a simplified 401(k) plan for a business with no employees other than the owner and his or her spouse. Contributions can be made to the plan both as an employee and an employer. Consider that:
Owner-only defined benefit plan – This plan is well-suited for business owners who want to increase or maximize their contributions. These plans allow for the highest contribution levels, often more than $100,000 a year. They are generally best for individuals who are older than 45, earn more than $100,000 a year and can contribute for at least three years. Key features include:
In addition to providing for your own retirement, you may want to offer retirement plans that attract and retain employees. Plans that use salary deferrals are the most popular choices. While these plans allow an employee to contribute on his or her own behalf, you can also make business contributions on behalf of your employees.
SIMPLE IRA – This plan is a low-cost way to help your employees save for retirement. It allows business owners and key employees to defer contributions, even if other employees choose not to contribute. As a business owner, you must make a small contribution to employees or commit to a small matching contribution. Consider this plan if:
Key features include:
SEP IRA – With this plan, there is no limit to the number of employees you can have, but it’s generally most appropriate for business owners with no employees or fewer than 10 employees. However, business owners with employees must be willing to contribute an identical percentage of salary for each eligible employee. Keep in mind that:
401(k) – This plan makes it possible for your employees to defer part of their salary for retirement savings. You can help by making optional tax-deductible matching contributions. The plan may also allow for Roth deferrals, which are contributed on an after-tax basis but have the potential for tax-free growth. Keep in mind that: