Can Your Business Be Your Retirement Plan?

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by Advice Chaser
by Advice Chaser

Starting a business is an investment. You invest time and work into it now, and someday, you hope, it will all pay off. That makes it seem like a great way to save for retirement. By investing as much as possible in your business, you can live off the profits when you’re older.

However, this is probably not the best way for business owners to save for retirement. Instead, make your business a part of your retirement plan, but not the whole thing.

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Why Your Business Isn’t a Retirement Plan

Naturally, you want your business to succeed more than anything. However, it’s a hard fact that not all businesses do. When you invest in the stock market, you buy parts of many different businesses in the hopes that some will do well. Expecting your business to pay for your retirement is like owning a retirement portfolio made purely out of a single stock. Since your savings aren’t spread out among many different stocks, your investment is much less secure.

There are two main ways to use your business to fund your retirement: you could either sell it as you approach retirement age, or you could keep the business and continue to receive a share of the profits even after you’re done working there.

Selling your business is certainly an option, as long as you can find a buyer. But taking the money in a lump sum can result in a large tax burden that year. Even if you minimize that by taking the money over several years, you still don’t enjoy the tax benefits of a retirement fund.

Continuing to own the business throughout your retirement means that you will still have control over your business. That can be a plus, but it can also be a source of stress because the most important decisions are still yours to make. If you choose this path, make sure you have a succession plan lined up. Choose a successor you trust and train them as you go, so they’re ready to take over when you want to hand over the reins.

Saving for Retirement as a Business Owner

The secret to a low-risk retirement plan is diversification. By spreading out your money into different types of investments, you reduce the risk to yourself if any of them don’t do well. For this reason, resist the urge to reinvest every penny you earn back into your business. Instead, draw a respectable salary and invest some of every paycheck into your retirement fund.

For retirement funds, you have two basic options. You could either invest on your own, separately from your business, or you could offer a retirement plan within your business for both you and your employees.

Investing as an Individual

If you’re looking to invest individually, you have several options. The most basic is the IRA. Anyone can open one, and you don’t need an employer. However, the contribution limits each year are low.

If you don’t have employees, you can have a SEP 401(k), also known as a solo 401(k). This works just like a 401(k), except that you are both the employer and the employee, so you can contribute more.

You can also invest outside of a retirement account, such as purchasing real estate, bonds, or mutual funds. This lacks the tax benefits of a 401(k), but you’re free to contribute as much as you want each year.

Investing Through Your Business

Depending on the size of your business, you have several options to provide a retirement account for both you and your employees. The most basic is the 401(k). This allows you to contribute to your employees’ accounts and also save for your own retirement.

A SEP IRA is a type of plan ideal for small business owners, whether you have any employees or not. However, if you do have employees, you have to contribute the same amount—as a percentage of each person’s salary—to their accounts as you do to your own.

The SIMPLE IRA is an option if your business has up to 100 employees. Each employee, including you, can contribute up to $15,500 annually. As the employer, you must contribute either 2% of their salary outright, or 3% as a match.

Remember, when setting up a retirement account for your business, you need a plan administrator you can trust. This is someone who will optimize the investments and take on the duty to manage your and your employees’ money responsibly. 

Find an Expert You Trust

As a business owner, your finances can get much more complex than average. That’s especially true when saving for retirement, because you may not have access to the same options employees do. But don’t rely on your business to be the retirement plan. Instead, find an expert with the know-how to guide your retirement savings. We can connect you with a financial advisor when you contact us.

Interested in more?

Your financial plan is as unique as you are. We partner with businesses all over the U.S., so that we can help you connect with the right options, all at no cost to you.