Jeff Brindley/
As a business owner you are responsible for every decision for your business. It is easy to be so busy that you do not spend the appropriate time thinking about and planning for your retirement.
When asked, a large number of business owners will say that their retirement plan is to sell the business. Unfortunately many business owners have used their retirement to start up their business so now they are relying on the sale of their business to provide for their retirement. Of course there are many issues with this plan. Even though it is “your” basket it still isn’t a great idea to put all of your eggs there. Most business owners do not have a strong plan for selling their business and maximizing the sale. Lastly, market conditions and other issues like health may require you to sell your business before you are ready and for pennies on the dollar.
That’s why I recommend to my business clients that they plan for at least three sources for funding their retirement. Of course selling their business could and should be one main source to fund their retirement. Business owners work hard to build their business and making sure they are get the most out of it at retirement is the smart thing to do. Social security could be another source to supplement retirement as well. The third leg of the stool that many business owners miss is saving in a strong retirement plan to further support their retirement. Many business owners are busy putting money into their business but as we have seen selling the business may not bring as much to retirement as the business owner expects.
When thinking about setting up a retirement plan it is important to think about what you are looking for in a retirement plan. That helps give us as financial advisors the information we need to make the appropriate recommendations. Just the simple question of “Do you have employees?” helps us to whittle down the plans that would be best for you and your business. We need to figure out what is important to you as the owner.
There are many options for retirement plans. Picking the right plan is essential to achieving your goals for your business, your retirement and your employees’ retirement. The Solo 401(k) is good for maximizing contributions of the owner and a spouse. The Solo 401(k) is limited to the business owner and the spouse. It does not allow for other employees on the plan. You have various options for the structure of your company and the contribution limit went up to $61,000 in 2022 if you are under the age of 50. A catch up contribution of $6,500 is available if you are 50 and over.
The SEP IRA is easy to administer, you can have employees, the plan is fully funded by the employer up to 25% of income or $61,000. This is another good plan for sole proprietors to put away a large sum for retirement each year but it can be expensive if you have employees because you have to fund the employees’ accounts using the same percentage. Also, catch up contributions are not allowed in this plan.
The SIMPLE IRA is limited to fewer than 100 employees. Employees can contribute up to 100% or $14,000 to their retirement. Employees 50 or older can also add a $3,000 catch up per year. The employer is required to contribute between 2-3%. The employer can contribute up to $61,000 a year with a $6,500 catch up. It is easy to set up and has few administrative burdens. Each employee can select the advisor that they would like to manage their account.
A simple 401(k) is limited to less than 100 employees. Employees elect to contribute and the plan can use auto contribution if they want to make sure as many employees enroll as possible. In that case the employee can opt-out if they would like. There are many options for the employer contribution including none at all. The company must file a 5500 but they are not required to do non-discrimination testing.
A Roth IRA can be a good option for sole proprietor owners that are not making a lot of money and want tax free distributions in retirement. However there are income limits to be able to contribute to a Roth IRA so make sure that you check with your tax preparer before contributing to one of these accounts.
The Cash Balance Plan can be one of the most complicated plans but can also be one of the most beneficial for the owner if they need to play catch up with their retirement. The plan is technically a defined benefit plan but acts like a defined contribution plan. It is one of the best plans for owners that need to play catch up. It is best suited for owners in the 50 to 70 age range. Employer contributions are mandatory but there is also a high level of tax deductions for the employer. Check with your tax preparer to understand the tax benefits. The participant cannot direct the investments in this plan and generally the returns are moderate. The payout comes at the termination of employment and is NOT paid out monthly like most defined benefit plans. When this money is paid out it can be rolled over into an IRA and the money can be used to purchase an annuity. Here are the typical prospects for a cash balance plan. Medical Groups, Law Firms, Professional Firms (CPAs, Engineers, Architects), Family Businesses, Closely-Held Businesses, Companies With Older Owners, Business Owners Who Value Asset Protection, Companies Trying To Attract Staff.
Business owners can use a cash balance plan in conjunction with a 401(k) plan. This is a great strategy for some business owners because they can put a significant amount (this amount is variable depending on the plan structure and age of the participants) away for retirement. This type of plan could also be used by a junior member of a firm or a young doctor to buy out the business or medical practice. A doctor is a good example for this type of plan since much of their income is spent on education and on setting up their office when they begin practicing. Many doctors end up playing catch up for their retirement later in life. This is a little more complicated strategy so please contact me if you have an interest in this strategy.
So to recap, business owners are very busy starting and running their business. It is important not to forget about planning for retirement. You need to ease the burden a little and don’t rely only on selling your business. Having three sources of retirement helps to ease the burden and create peace of mind in retirement.
Jeff Brindley is a financial advisor at RWS Financial Group. He contributes his financial column Brindley’s Briefs to Gazeta Dielli every month. You can reach him at 833.797.4636 X137 or via email at Jeff.B@RWSGroup.org.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc. a broker-dealer, Member FINRA/SIPC. Jeffrey Brindley, Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. RWS Financial Group is not affiliated with Cambridge Investment Research.