Retirement Plans for Small Businesses

If you are among the nation’s more than 31 million small businesses owners, you likely spend much of your time juggling day-to-day business activities and put off planning for the future.

If retirement planning has fallen on your back burner, now is the time to bring it to the forefront. As a small business owner, you deal with a different world of retirement plans than somebody who is an employee, making it all the more important to closely explore your options when deciding what’s right for you.

Elderly female baker wearing protective medical face mask working at her shop during coronavirus pandemicPlan options to consider

Self-employed individuals or business owners should be sure to fund IRAs as much as possible. The annual limit for 2021 is $6,000 ($7,000 for those aged 50 and up). Funding IRAs is only a starting point. A few other options for the self-employed and business owners to consider:

Solo 401(k)s — This offshoot of the traditional 401(k) plan can be established if you(or you and your spouse) are the only employees of your business. It offers the ability to direct the largest potential contribution annually. As much as $58,000 can be set aside in 2021 ($62,500 for those age 50 and older). This comes from a combination of employer and employee contributions. There are initial costs and efforts needed to start and maintain the plan, as it requires a plan administrator. Earnings grow on a tax-deferred basis and contributions made by an incorporated business can be deducted from business expenses. For non-incorporated businesses, the owner can deduct contributions from their personal income. For those with employees, a full 401(k) plan can be established, though different rules will apply.

SEP IRAs — A SEP IRA is very similar in structure to a Solo 401(k), with two main exceptions. Costs are minimal, as it does not require the support of a plan administrator and it can cover employees. In this plan, all contributions are made by the employer equal to no more than 25 percent of compensation (a maximum of $58,000 in 2021). The employer can determine what percentage of compensation to set aside each year, but it must be consistent for all employees, including the owner.

SIMPLE Plans — These plans allow businesses with fewer than 100 employees to establish either a SIMPLE IRA or  SIMPLE 401(k) for each employee. Employees can make salary deferral contributions of up to $13,500 ($16,500 for those 50 and older) in 2021. Employers are obligated to provide a matching contribution in SIMPLE 401(k)s of 3 percent of compensation for employees who elected to defer or 2 percent for employees who did not elect to make contributions.

Your business as a retirement asset

Of course, monetizing the value of your business may be another way you fund your retirement. If your business can continue to operate successfully without you, it should have value when you retire. Selling your business to a current  employee may be an option or you may want to look for potential outside buyers.

As a business owner, you have unique challenges and opportunities when it comes to planning for a successful retirement. Talk to a financial advisor about how to put a strategy in place to assure your long-term financial security.

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Michael W. K. Yee, CFP®, CFS®, CLTC, CRPC®, is a Private Wealth Advisor, Certified Financial Planner™ practitioner with Ameriprise Financial Services LLC in Honolulu, HI. Specializing in fee-based financial planning and asset  management strategies, he has been in practice for 37 years. Ameriprise Financial cannot guarantee future financial results. Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. Investment advisory products and services are made available through Ameriprise Financial Services LLC, a registered investment adviser. Ameriprise Financial Services, LLC. Member FINRA and SIPC. 1 U.S. Small Business Administration, “2020 Small Business Profile.” © 2022 Ameriprise Financial Inc. All rights reserved.


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