Retirement for Small Business Owners
As a small business owner, you’re probably concerned about the welfare of your employees and the progress of your business. Yet, its ok to show a little concern about someone who matters greatly – you!
Unfortunately, there’s nobody there offering you a 401(k), which means you need to prepare financially for your retirement. That’s why Abigail Y. Murray, CPA, LLC offers you some words of advice from people who know and care.
I’ll Receive Social Security…
Unfortunately, current statistics project that by 2035, only 3/4 of social security benefits will be disbursed. Add on to that the claim by experts, that Americans will need 70 to 90 percent of their working salary to maintain their standard of living during retirement, and you have a recipe for an unnecessarily bleak outlook.
That’s why it’s essential to develop an exit strategy. And sometimes that means that the “baby” you put your blood, sweat, and tears into, just might be the key to your successful retirement.
The reality is, selling can be a necessity, especially when retirement is on the line.
Of course, as an intelligent and capable small-business owner, you need to be aware of the market. This means recognizing the pattern and flow of the current financial atmosphere to ensure you can benefit from a given market standing.
But you never want to be in the position of a distressed seller. Being in this position means you won’t be able to reap the premium value of your company.
As previously stated here, “While 35% of small business owners said they were depending on income from the sale of their business to fund their retirement in a 2014 study by the Guardian Insurance and Annuity Company, only 17% had identified potential buyers.”
Bottom line. Have an exit plan.
Oh…There’s Tax Advantages…
Retirement savings can mean tax deferral.
There are of course limitations to the amount of contribution to a given retirement plan, and the IRS website provides easy availability here.
A quick synopsis of this year’s changes includes:
| Chart of Select Limits | |
| 401k Plan Limits for Year | 2016 |
| 401k Elective Deferrals | $18,000 |
| Annual Defined Contribution Limit | $53,000 |
| Annual Compensation Limit | $265,000 |
| Catch-Up Contribution Limit | $6,000 |
| Highly Compensated Employees | $120,000 |
| Non-401k Related Limits | |
| 403(b)/457 Elective Deferrals | $18,000 |
| SIMPLE Employee Deferrals | $12,500 |
| SIMPLE Catch-Up Deferral | $3,000 |
| SEP Minimum Compensation | $600 |
| SEP Annual Compensation Limit | $265,000 |
| Social Security Wage Base | $118,500 |
Two of the more highly touted options are the traditional and Roth IRA plans which allow anyone with an employment income to contribute to. This is beneficial to those with no employees eligible for a 401(k) plan and also allow for spousal contribution.
IRA’s offer tax-deferred growth until those assets are withdrawn (during retirement). They may also offer tax-deductible contributions for those not participating in an employer-sponsored plan.
Roth IRA’s work in the opposite manner compared to the traditional format. You’ll have to pay tax on income before you make contributions to that Roth account, but you won’t feel the tax burden when you make withdrawals during retirement.
There are stipulations however to qualify for a Roth IRA. You must have an adjusted gross income that is less than $116,000, or $183,000 for married couples filing jointly.
Health Savings Accounts…
HSAs can be highly effective if used effectively, meaning fully-funded and invested, without any withdrawals until retirement. In fact there is no need for an HSA owner to utilize it for qualified medical expenses incurred.
If employed alongside a High Deductible Eligible Health Insurance Plan, then the account can grow tax-free for years.
Even if the owner should pass, the beneficiary either becomes the new owner of the account or has it paid out upon death.
So Plan Ahead….
Whether you are a small business owner or simply want to plan you future, Abigail Y. Murray, CPA, LLC wants to be there every step of the way. Let us guide you through the processes of securing an IRA or solo 401(k) to help you ensure that breezy beaches and cold margaritas aren’t just a dream, but a retirement reality. Reach us at [email protected] to find out how we can help.