Retirement is a challenging time for everyone, including working professionals and business owners. Employers usually take care of the pension fund and retirement of working professionals; however, business owners must arrange and save for their retirement.
Business owners or individual entrepreneurs face critical challenges in terms of saving for retirement. No employer chalks out a plan for them, and they need to do everything on their own, for their own. Additionally, owning small businesses makes it harder to save for retirement due to profit limitations, no or little savings, and no concrete plans for retirement. However, it is equally necessary for business owners to remain disciplined and save for retirement as it is for working professionals.
A variety of retirement savings alternatives are available to business owners. These options are easy to set up, do not involve high costs, and are particularly suitable for business owners. In addition to saving up a comfortable amount to fund the retirement, they also help save taxes and increase the pension pot. Business owners can use a pension calculator to decide how much they should need to contribute to their pension and what their final retirement income might be. The retirement fund figure depends on their current age, desired retirement income, and monthly contribution.
The simplest and most common way to save for retirement as a business owner is through Savings Incentive Match Plan for Employees IRS or SIMPLE IRA. The account is more suitable for business owners with up to 100 employees. In SIMPLE IRAs, employees can contribute up to $13,500 of their pre-tax salary if they are under 50 years of age and up to $16,500 if they are over 50.
Employers or business owners can match the contributions made by the employees up to 3% of the compensation of employees. The contributions made by employers to SIMPLE IRAs are tax-deductible.
Simplified Employee Pension individual retirement account or SEP IRA is another excellent alternative for business owners to save for retirement. SEP can be used by almost all business owners, irrespective of the number of employees or their business structure. It can be set up for sole proprietorships, corporations, non-profit organizations, and partnerships. Moreover, it considers business owners as employees and allows them to contribute to their retirement savings.
Employees can contribute the lesser of up to 25% of their pretax income or $57,000 to their SEP IRA. The contributions made by business owners to their own and employees’ accounts are tax-deductible and can be varied from year to year depending on the business performance. SEP IRA is also easy to set up and does not involve a lot of operational costs.
Solo 401(k) are similar to traditional 401(k) plans, except that they cover just the business owner and their spouse. It is a good plan for business owners to save for their retirement without getting the employees covered. The business owners can contribute a lot of money to their solo 401(k)s, acting as their employees.
The business owners can contribute up to $19,000 per year to their individual 401(k) if they are under 50 years of age and up to $25,000 if they are above 50. The owners can also contribute an additional 25% of their compensation up to $56,000 to their solo 401(k). It makes it possible for business owners to contribute more in the years their business is doing well and beef up their pension pot faster. The upper limits for individual 401(k)s double up if the spouse of business owners also works for them.
Roth IRAs are not made specifically for business owners; however, they work effectively for them. They are a special type of IRAs that allow individuals to contribute their after-tax money towards retirement savings. Therefore, the business owners do not recieve tax benefits on contributions made towards Roth IRAs; however, the entire withdrawal from them is tax-free.
Business owners can strategically use Roth IRAs to contribute when they have excess funds, withdraw tax-free, and offset taxes incurred on contributions made to other retirement savings accounts. The upper limit for both IRA contributions for 2021 is $140,000 for singles and $208,000 for married couples.
Thus, business owners have a wide variety of options to save for their retirement. The plan and method they use depend on their age, risk tolerance, financial stability, and other financial goals. Business owners can also look to fund their retirement by liquidating their business; however, the ability to sell the business and its value depends on several factors and may or may not be possible at the time of retirement. Therefore, business owners must consult financial advisors to create a strategic plan to save for their retirement and get tax benefits while contributing to their retirement savings.