Planning for Retirement When You Own a Small Business

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$5700Small business owners don’t get the attractive benefits packages offered at larger firms.  Instead, it is up to them to create their own basket of benefits and plans.  Along with health insurance and vacation time, they can offer themselves and their employees’ retirement plans.

As a small business owner, planning for the financial future is essential, even if it takes a bit more work and consideration.  To make the process easier, here are some affordable retirement plan options that are particularly appealing for small business owners and their employees:

1.  SEP (Simplified Employee Pension Plan)
In terms of flexibility, SEP’s are the winner.  Each year, the business owner can decide anew how much to contribute, depending on how well the business is doing.  Owners can contribute up to $49,000 per year, which is tax deductible.  The catch is that the owner has to give the same amount to each employee equally, regardless of the employee’s value.

2.  Simple IRA (Savings Incentive Match Plan)
With the Simple IRA, the employer and the employee both have to contribute funds.  Employees who choose to participate receive a fixed contribution rate (usually 3% of their annual salary) from their employer.

The drawback of this plan is that it limits the amount the business owner can save for him/herself.  In 2010, the employee contribution limit is $11,500, or $14,000 for an employee over 50, plus the extra 3% match.

3.  IRA ‘s (Individual Retirement Account and Roth Accounts)
Anyone who earns taxable income can open an IRA.  Business owners who want to sock away more money for themselves can open an IRA along with other retirement accounts. A traditional IRA allows you to claim a tax deduction on contributions.  Interest earned is tax-free until withdrawal at retirement.

Roth IRA’s are highly worthwhile.  They do not earn you a tax deduction, but the interest earned is tax-free.  The contribution limit is low: $5,000 in 2010.

4.  Keogh Retirement Plans
Keogh plans are best for small business owners with very few employees.  Like a traditional IRA, it allows contribution of pre-tax dollars.  You can contribute 25% of your earned income. Keogh’s allow you to save for retirement, while serving as a tax shelter that defers tax payments.  When you start to receive payments (distributions) during retirement, you will have to pay taxes.

5.  Profit Sharing Plans
Any business owner can take advantage of profit sharing, which allows you to share in the business’s success.  Each year, you can save 25% of your salary, up to $49,000.  Contributions vary from year to year, based on the company’s performance.  Employees who have worked at least 1.000 hours in the past year participate in the profit sharing.

Author: Gary Barzel, Manager of Business Development for FastUpFront: Small business loans and alternative financing provider. Gary is also the senior editor of the FastUpFront.com Small Business Blog.

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{ 3 comments… read them below or add one }

Everyday Tips December 1, 2010 at 7:45 am

Informative post. That is very interesting about the requirements of the SEP. So you have to give the same amount to the highest ranking salesman as someone far less productive? I guess that is how it is at the corporate level too now that I think about it.

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Ken @ Spruce Up Your Finances December 1, 2010 at 8:09 pm

Nice post. One of the benefits of starting a small business is that there are a lot of retirement options available. Some of the plans have higher maximum amount enabling small business to contribute more.

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Michael Carver October 4, 2011 at 6:40 pm

I know several business owners in our town who sponsor a retirement plan. I’ve seen a positive effect on their ability to retain employees and on workers’ attitudes and performance. Still, the retirement plan depends on many factors, including how comfortable a business is with plan administration and tax forms.

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