Retirement can seem like a dark cloud for small business owners. Many invest blood, sweat and tears – and every penny – in building their business, but never put money aside for the future.
A large number of entrepreneurs have reported that they have not set aside any retirement savings. For some, selling the business is their only retirement plan.
That’s a risky bet, says Keith Hall, president and chief executive of the National Association for the Self-Employed.
“You’re putting all your eggs in one basket. Not just your current lifestyle, but also your future,” says Hall. “If something goes wrong, you sacrifice both.”
And the list of things that could go wrong is long: your business could fail. Your health may fail. You may not find a buyer. You may have to sell for less than you need. You may not be able to fully withdraw.
Instead of gambling that everything will work out, diversify your nest egg so it lasts well into later years.
MAKE RETIREMENT PLANNING A PRIORITY
Saving for retirement is often the last item in your budget and the first to be cut in favor of other priorities, says Hall. Instead, make it as important as paying your mortgage or running your business.
This will not come naturally to most entrepreneurs, who are often focused on immediate needs and tend to plan in three to five year increments.
“It’s hard as an entrepreneur and small business owner to think beyond 20 years,” says Mary Bell Carlson, owner of Carlson Consulting LLC. “I’m often figuring out what to do today for immediate cash and long-term gain.”
But Carlson, a financial advisor and certified financial planner, makes a point to invest where she can. She and her husband contribute to his employer-provided retirement plan. They also put money into individual retirement accounts, among other investments.
“My biggest lesson has been to start, no matter how small the amount; it’s important to start,” she says.
Determine what you can afford, whether that’s 1%, 5% or 10% of your gross earnings, and commit to it, says Hall. Over a long enough window, even small, regular contributions will add up to something meaningful.
There are a variety of retirement plans for small business ownerseach with requirements, definitions and tax implications.
— TRADITIONAL, ROTH IRA: Individual retirement accounts are easy to open and available to almost anyone. You can contribute up to $6,000 in 2022 (up to $7,000 if you’re 50 or older). The main difference between traditional and Roth IRAs it’s whether you want tax savings now or later. Traditional IRAs use pre-tax income, but you pay taxes when the money comes out. With Roths, it’s the opposite.
— SOLO 401(K): Available to business owners without full-time employees (exception made for a spouse). The contribution limit is up to $61,000 for 2022, although it is split into two parts, each with limitations. Similar to an employer-sponsored 401(k), contributions are pre-tax and withdrawals are taxed as income.
— SEP IRA: A Simplified Employee Retirement IRA, or SEP IRA, works much like a traditional IRA, except you can contribute a lot more. Annual contributions are limited to $61,000 in 2022 versus $6,000 for a standard IRA. Another key difference: If you put money into your SEP IRA, you must contribute an equal percentage to employees. This option is best for solopreneurs or those with few employees.
— SIMPLE IRA: This option has a lower contribution limit, up to $14,000 in 2022 (for those under 50), but offers employee accounts and is easier for small companies to administer than a 401 (k) traditional. You must offer a 3% match or a total contribution of 2% to all employees. You can deduct contributions made to your account and those made on behalf of your employees.
GET INPUT FROM A PRO
Of course, you can try to decipher which retirement plan is best for your business. Or you can work with a certified financial planner or registered investment advisor to determine the best path. Doing the latter can give you confidence in your strategy, help you avoid any costly penalties, and ensure you’re not leaving money on the table.
If selling is still part of your retirement plan, the help of a professional is essential, says Norm Sherman, a certified mentor with SCORE, a national volunteer organization that provides free business mentoring. First, you need to know if your business is for sale and what you can realistically expect to earn in a sale.
An investment banker or business broker can evaluate your revenue, profit margins, business structure and market to give you an honest appraisal and help you better position your business for a future sale.
“It doesn’t cost you anything to get these questions answered,” says Sherman. “Don’t operate blindly; find experts who can help you.”
The content is for educational and informational purposes and does not constitute investment advice. Kelsey Sheehy is a writer at NerdWallet. Email: email@example.com. Twitter: @kelseylsheehy.
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Self Employed Retirement Plan Options https://bit.ly/nerdwallet-retirement-plans-self-employed
Roth IRA vs Traditional IRA https://bit.ly/nerdwallet-roth-or-traditional-ira-account
What is a SEP IRA? How SEP IRAs work https://bit.ly/nerdwallet-sep-ira