Small business owners are important drivers of economic growth. They help create 1.5 million new jobs each year and are responsible for 64 percent of new jobs created in the US as per a report by the Small Business Administration. Small businesses also employ 47.1 percent of all private sector employees. It goes without saying that they are an important component of the economy. However, it’s not an easy job. The hard work that goes behind running a small business can be taxing. Small business owners often find themselves alone dealing with various challenges like finding the right funds for growth and expansion, hiring suitable employees, purchasing the latest machinery, advertising and marketing their products and services, product sales, and so much more. Not only this, but small business owners are also responsible for their personal growth and future security along with those of their employees.
If you run a small business, you do not have a salary to bank upon. You are responsible for creating an income for yourself. The same can be said for your future security and retirement savings. There is no option to rely on an employer-sponsored retirement plan where your employer matches your contributions. Since you are your own employee, saving for retirement falls entirely on your shoulders. Moreover, since businesses can have erratic earning patterns where you can earn an enormous profit one month and have little to no sales the next, saving in a stable retirement plan for your future needs becomes imperative.
Having a retirement plan is also important for your employees. Businesses that offer their employees retirement plans can help see better performance and productivity. The employee also feels a sense of loyalty to the company that further benefits the business. Hence, having a business owner retirement plan is extremely necessary for the employer as well as the employee. To guide you through this process, consider engaging the services of a financial advisor, who can set up a retirement plan for you and your employees to help secure your financial future.
If you are a small business owner, here are some reasons why you should pay attention to retirement planning:
If you do not know how or where to start retirement planning, here are some small business retirement plans that can help you:
Setting up a SIMPLE IRA is simple, just like the name suggests. The paperwork is minimal and a lot less compared to setting up a 401(k) retirement account. A SIMPLE IRA is also a cost-effective option, and the charges of opening and maintaining the account are quite low. And there are no filing requirements with the Internal Revenue Services (IRS) for the employer either. Furthermore, small business owners are eligible to get a tax credit to offset the costs of a SIMPLE IRA with auto-enrollment.
However, the annual contribution limits set for a SIMPLE IRA are a lot lower than other similar retirement accounts. Over a period of time, this can severely hamper your retirement savings. Another shortcoming of a SIMPLE IRA is the absence of a Roth variant. The withdrawals taken before the age of 59.5 also trigger a 10% penalty. And withdrawals made within the first two years of investing are met with a 25% penalty. So, the account lacks liquidity in the short term.
A SEP IRA can offer higher contribution limits than any other IRA. As of 2021, you can contribute up to $58,000 in a SEP IRA in a year. However, the annual contribution limit cannot exceed 25% of the total salary. The employer can also only contribute up to 25% of the employee’s salary. Since the annual contribution limit is already high enough, there is no catch-up contribution for people over the age of 50. There is also no Roth variant for the SEP IRA. In addition to this, you also cannot borrow any money from your SEP IRA and withdrawals before the age of 59.5 attract a penalty of 10%. However, the SEP account is owned and controlled by the employee and not the employer, and therefore makes for a better pick for the employee.
You can easily set up an IRA. There is no age limit to open an IRA as long as you have a taxable income. You can open an account with a bank or a brokerage firm. The process is quick and may only take a few minutes of your time. Moreover, you are in charge of your investments and can manage the account as you like, unlike a 401(k) where you are only a participant, and the employer takes charge of most decisions. As of 2021, you can contribute up to $6,000 per annum with a catchup contribution of $1,000 ($7,000 in total) for people over the age of 50. Similar to other retirement accounts, you are eligible to make withdrawals only after the age of 59.5. Early withdrawals incur a 10% penalty. In the case of a traditional IRA, you also have to start taking Required Minimum Distributions (RMDs) starting from the age of 72.
The Solo 401(k) offers the traditional as well as the Roth variant, so you can make a choice as per your taxable income. If you pay more tax now, you can opt for the Roth variant and vice versa. However, regardless of what you choose, you can only make withdrawals after the age of 59.5. Otherwise, you will have to pay a 10% penalty.
There are many retirement plans for small business owners to choose from. But it is important to choose the one that benefits you the most. Pay attention to the features, contribution limits, expenses, ease of operation, control, etc., that each retirement account offers you and your employees, and then make a decision. Also remember, that as a small business owner, it is equally important to keep your employees happy and satisfied by offering them a good retirement plan as it is for you to save for your own future requirements. So, do not neglect either and aim to strike the right balance.
If you are still not sure which option is ideal for you, a professional financial advisor can help you select the best retirement plan for small businesses.
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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.