Imagine this: you run a successful convenience store in your neighborhood. Everything is running smoothly and you’re making good money. Years pass, and now you are a couple of years short from turning your retirement age. You have low energy these days and you can’t run the business as efficiently as when you were in your youth. You turn to your children to help you with the business, but they are “too busy” and couldn’t possibly keep the convenience store going. As a last resort, you decide to sell your shop.
While it may be a good option to get some fast cash, the money that you have earn on the sale will be the total savings that you have for retirement, potentially leaving you with insufficient funds for the 20-30 years of your post-retirement life. What could you have done to save enough money instead? Set up a retirement plan.
Retirement Saving Plans for Small Business Owners
Here are some retirement plans that are specifically designed to cater to self-employed individuals and small business owners. Have a look:
1. Keogh Plan
If you want to go with a plan that offers great savings for the future, the Keogh plan may be one option. Granted, it is a bit complex for most people, but once you get hold of it, it proves to be quite beneficial for you. Often called a “qualified” or “profit-sharing” plan, this plan requires you to contribute a fixed percentage or sum every pay period. The total contributions for the year is capped at $70,000. To use the Keogh plan, you will have to ensure that your business is registered as partnership, sole proprietorship, or limited liability company (LLC). The plan is best suited for companies who have a single high-earning boss – for example, the owners of a convenience store or a consulting firm – or a couple of moderately-paid employees. Keough plans are less popular these days since more people are turning to the other plans like the SEP and SIMPLE.
2. SEP IRA
A Simplified Employee Pension is a great option for sole proprietors. With a maximum limit of $57,000, the plan allows you to contribute up to 25% of your net earnings. This limits the contributions to $280,000 annually. The plan is popular because of its flexible rules. It allows people to contribute lump sum amounts annually or skip it altogether.
3. Simple IRA
A “Simple” IRA, otherwise known as a “Savings Incentive Match Plan for Employees,” has similar rollover, distribution, investment rules as a SEP or traditional IRA – and is another great option for small business owners. A SIMPLE IRA allows employees to contribute up to $13,500 in 2020, while those over age 50 can add an additional $3,000. This plan should be opened with a financial institution and there is a strict withdrawal penalty if the money is taken out within the first two years of opening the account.
4. Health Savings Account
Health savings accounts are maintained to allow people to save some money for an emergency. The healthcare expenses are increasing at an exponentially high rate (usually 7-9%, SOURCE: https://www.thebalance.com/causes-of-rising-healthcare-costs-4064878) and, for most people, it gets difficult to pay for a medical issue when you have to hit the emergency room. Even though this particular account is opened for medical expenses, you can treat it as a retirement savings account by not withdrawing the funds year after year – if you don’t require funds for any sort of medical emergency. However, you will have to pay income tax on the current rate of tax in the year you have withdrawn the money if the funds are not being used for a medical expense.
5. CalSavers
Small business owners in California should also consider contributing to CalSavers accounts. These are essentially post-tax Roth IRAs. By participating in this program, you will end up saving a substantial amount of money that will help you during your post-retirement years. The CalSavers official site has everything that you need to know for setting up an account. Under this plan, you also have access to your savings all the time.
Why Don’t Small Business Owners Set Up a Retirement Plan?
Alas, it is quite common for small business owners to not set up and maintain a retirement plan for themselves or their employees. It is unfortunate that people who have worked hard throughout their life may end up with no money because they didn’t start saving at the right time. Sometimes, there are unavoidable circumstances that may lead to zero savings. Some of them are:
1. Paying off major debts
2. No steady income
3. Healthcare expenses
4. Costs of running the business
Even though covering huge expenses is sometimes part of the territory when running a small business, it is always advisable that they think seriously about setting up a retirement savings account. It only becomes a priority if you make it so.
Why Should You Set Up a Retirement Plan?
Retirement savings accounts are a great option for small business owners and their employees. Some of the benefits of setting up a retirement plan include:
– Benefit from tax breaks – Many plans offer tax-deferred growth on earnings that can be quite beneficial.
– Your money will grow – many savings accounts also offer yearly interest on the amount saved. This will be a perfect way for you to earn some extra money along with the yearly contributions that you normally make.
– Attract and retain employees – Employees are more likely to work at an organization that offers a retirement plan.
Ask any financial expert and they will give you the same advice: start saving if you haven’t already. For business owners, that means having two accounts, one for retirement, the other for tackling any sudden financial emergencies.
The Final Word
Not setting up a retirement savings account is, unfortunately, way more common than it should be. Always understand that your business may not continue to run as smoothly as it is today. Even if the business has a strong potential for growth, you may not have the same level of energy to deal with the pressures of running a business. At some point, you may want to retire. In some cases, your health may force you to retire whether you want to or not. For those days, it is best to have access to a steady income stream. For that to happen, opening a retirement savings account is the best option.