Funding Your Retirement Plan As A Small Business Owner
Being a small business owner is not an easy task. You have to extend your hands on a million things each day to ensure that your business is moving in the right direction and making the profit that you expected. We may not think of a retirement plan when we are that busy in our business. For most people, a retirement plant is at the bottom of their to-do list.
If you have a better understanding of your retirement plan option, it not only helps you to save enough money towards your retirement but also lower the tax liability. Since we are reaching the end of 2020, it is the best time to consider all your option and start funding your retirement plan.
Funding Through Tax Savings
It is no secret that business owners, small and big alike, are always trying to find different ways to save on taxes. Fortunately, a retirement plan offers an excellent opportunity to save and also tax-deferred growth. Therefore, saving for a retirement plan is a win-win situation.
The Simple IRA, SEP IRA, and Solo 401(k) are the three most popular retirement plans that business owners with 10 or fewer employees usually choose. All these retirement plans offer the business owner a significant tax benefit. As a business expense, you can potentially deduct the employer contribution to your plan. You might be able to qualify for a tax credit of around $500 and also maintain the retirement plan for 3 years if this is the first plan that you offer.
Funding Through Traditional Retirement Planning
The 401(k) plan might be the most popular retirement plan that small business owners usually choose. However, there are several other good retirement plans that might suit you well.
The number of employees you have on your payroll has a significant role to play in the retirement plan you want to choose. It will also decide whether you are looking for a simple retirement plan or a luxury plan.
If you are employing less than 100 people a year, the Simple IRA is the best retirement plan for you. If you are below 50, this plan will allow you to save up to $12,500 a year and if you are above 50, you can save up to $15,500 a year. The problem with the Simple IRA plan is that it only has limited options for an additional retirement plan.
SEP IRA is also like Simple IRA because it is also available to the employees and the business owners. Small business owners with fewer employees usually choose SEP IRA over Simple IRA as their retirement plan.
A simple 401(k) retirement plan is almost identically similar to a Simple IRA retirement plan. The main difference between these two retirement plans is that you can take a loan against the account balance with a Simple 401(k) retirement plan. This is not possible with a Simple IRA plan.
Solo 401(k) is the retirement plan that business owners with no employees usually consider. When compared to Simple IRA, this retirement plan allows you to save more amount. You can save up to $18,000 per year with this plan.
Another option you can consider is a Defined Benefit Plan. This plan will be suitable for you if you are looking for higher contribution limits. However, this plan is ideal for companies that have 50 or fewer employees.
Other Ways To Fund Your Retirement Plan
Many small business owners are not a fan of setting up a retirement plan. If you are one such businessperson, you can also consider alternative funding options like cash-value life insurance, which will play an important role in the funding of your retirement. Many business owners ever potentially sell their business for their retirement funding.
However, selling your business solely for the purpose of funding your retirement is not advised. Before you look for a buyer for your business, you need to make sure that your business is sale-worthy. For prepping your business for sale, you also have to look into completing an appraisal. There is a saying that the worth of a business is only what the buyer is willing to pay.
Many small business owners are also looking for life insurance because they can play a significant role in the funding of their retirement. A common misconception is that people believe that life insurance is only good for the beneficiaries. However, there are several life insurance policies that will allow you to fund your retirement plan. It is better to work with a financial advisor to find a better insurance policy that will help you to meet your retirement plans.
The end of 2020 is near and it is the best time to choose a retirement plan and start funding that plan. Many people only rely on their businesses to provide enough cash to fund their retirement. If you start funding today, you can save a significant amount for your retirement life.