Retirement Planning Options for Small Business Owners

As a small business owner or an entrepreneur, you are used to taking the lead. But there is one frontier you may still need to master… the future of your retirement. That is a matter of doing what you can to ensure all your hard work leads to your ideal retirement lifestyle.

While a 401(k) plan is the dominant retirement bedrock for employed Americans, small business owners are in a different boat. You are your own employer.

So whether you have zero or 100 employees, you must make the choice to act toward building a strong financial future for yourself. Depending on the workplace benefits of your organization, you may also impact those aiding you in your entrepreneurial dream.   

And Social Security benefits can help, but only to a point. A motivating factor for building up retirement savings is the fact that, as an entrepreneur, you bring home a certain level of income. Portfolio holdings, personal assets, and savings most likely will play into your needs as a high-income household, as Social Security can only go so far.    

Not only that, chances are you make more than the income limit placed by Social Security. For 2024, the maximum amount of taxable earnings is $168,600, up from $160,200 in 2023.

And what is another focal point for small business owners? Over-relying on their business as their retirement safety net. But time and again, historical data has shown this to be true: It’s risky to put all of your eggs – namely, your retirement and financial comfort – into one basket.

Reinvesting Rather Than Planning for Retirement?

Don’t have an established retirement plan? You aren’t alone.

In a recent survey by online business community Manta, 34% of entrepreneurs said they don’t have a retirement plan. Not making enough profit to save for retirement and funneling money back into the business were the most common reasons why that they cited.

Those findings reflect what surveyors have uncovered in other studies. In another survey by New York Life, small business owners said they strongly rely on their businesses for their future retirement outlooks. More than 40% reported that their companies “would be their retirement plans.”

While an improved economy might suggest more opportunities for entrepreneurs to sock money away for their golden years, the reverse is actually true. In an old study by TD Ameritrade, only 28% of small business owners weren’t contributing to any savings plan.

Why Aren’t Small Business Owners Saving for Retirement?

What could be behind this rise in people not being ready for retirement? For many small business owners, simply the time investment. It’s a never-ending rush to start a business and keep it running.

With many business and life priorities competing for attention, entrepreneurs often focus on the activities that move the needle forward for their companies. And what could be some other factors? Current business structures, net-worth that is tied up in business equity, and the inherent complexities of planning for successful people’s affairs are among the potential detractors.

Entrepreneurs Have Options

The good news is that entrepreneurs and small business owners do have retirement saving options. Some of these choices have advantages not seen in traditional employer-sponsored 401(k) plans.

What’s more, adding a plan to your business can benefit you in more ways than just building your retirement nest egg. If you have employees, creating a retirement plan allows you to start them down the path of improving their financial futures. Not only that, it can also help boost your competitiveness when trying to attract and retain talented employees.

There may be potential tax benefits for offering a plan, including the potential to deduct employer contributions as a business expense.

You might also be eligible for a tax credit for certain expenses incurred while starting and maintaining your very first plan for some years. Other benefits might be available with starting up a plan. Talk to a financial professional who specializes in employer retirement plans for small businesses for more details.

What’s Your Plan?

If you run your own enterprise, primary retirement saving solutions (beyond the time-honored 401(k) plan) for you to consider include:

• SEP IRA (Simplified Employee Pension Plan)
• SIMPLE IRA (Savings Incentive Match Plan for Employees)
• Self-employed 401(k) plan (sometimes called a Solo 401(k) plan)

According to experts, choosing the best plan for you depends on what you want the plan to help you achieve, whether it’s ease of administration, level of contributions, or the ability to include employees. Here is a brief rundown on features and characteristics for each plan.

Basics of Different Retirement Plan Options

An SEP IRA is designed for the self-employed and small-business owner who wants to make tax-deductible (business expense) contributions for employees, regardless of the number of employees.

An SIMPLE IRA is ideal for businesses with fewer than 100 employees. This IRA is funded by both tax-deductible contributions you make as well as pre-tax contributions made by employers. It shares these characteristics with a traditional 401(k) plan.

A Self-Employed 401(k) plan allows the self-employed to build up a tax-deferred retirement balance by offering the most generous contribution limits of any of these plans. Yet it is only intended for business owners with no employees other than a spouse (and with no plans to add employees).

The business formats eligible for all three of these plans include sole proprietor, a partnership, a corporation, or an S corporation. The only caveat is that, in the case of the Self-Employed 401(k) plan, there can be no “common law” employees (those with no ownership interest in the business). Spouses are an exemption from this.

What’s Your Retirement Strategy?

If you are gearing up to retire, it’s time to consider the whole picture. Does your retirement plan hinge on the successful sale of your business?

That could be a mistake, experts say in an article by the National Federation of Independent Business. Instead of a windfall for retirement income, profits could fall short if a business weren’t sold at the right price or the right time.

This isn’t to downplay the importance of creating, and implementing, a succession plan that focuses on maximizing the valuation of your business. Far from it.

Rather, a diversification strategy beyond your succession plan can help elevate your probability for retirement success. It may help guard against the risk of what might happen should your business selloff not go all according to plan.

Secure Your Retirement Future

Beyond asset diversification, consider other important questions for your financial picture. Does your strategy aim at minimizing risk and maximizing income prospects (including on your tax bill)? Do you have a long-term financial roadmap that does more than simply planning on cashing out your business?

According to the New York Life survey, nearly two-thirds (66%) of small business owners recognize they need to do more to ensure they receive adequate income from their business in retirement. Over half (54%) say that they have a backup plan in case they are unable to sell their business or if the proceeds aren’t sufficient. Meanwhile, 51% of small business owners report a goal to retire by age 65, which reinforces the importance of ensuring their finances are in order. 

Depending on your circumstances, you may need a diversity of financial resources in case you face an unforeseen catastrophe. Consider whether your assets are protected from risk, including legal risk.

What are the specifics of the buyout or succession plan you have in place? If your transition plan includes turning your business over to your partners, how will it be funded?

It’s paramount to start answering all of these questions and more now. As you consider your “what ifs,” you may benefit from the guidance of a financial professional who has helped other entrepreneurs reach a successful retirement.

Looking for Guidance?

Proactive planning can help you achieve the ultimate reward for being your own boss… a retirement that others can only envy. If you are on the lookout for a financial professional to possibly assist you, you can connect directly with someone at SafeMoney.com.

Use our “Find a Financial Professional” section to locate someone and request a no-obligation first appointment. If you need a personal referral, call us at 877.476.9723.