Retirement Strategies for Entrepreneurs

Let’s face it- when you’re an entrepreneur- planning for the day you retire is likely the last thing on your mind and not your biggest priority. You left your “good 9-5” to build the business of your dream. You traded in “stability” and a steady paycheck for autonomy over your life and no ceilings to your potential. Being self-employed gives you a certain measure of freedom but do you REALLY want to work forever or have you set your sights on building a business that can thrive without you one day? If the latter, know that when it comes to planning for retirement TIME is literally MONEY- the longer you put off investing the less time your money has to grow. Keep reading to learn about the options you have for retirement plans as a small business owner. 

1. Traditional or Roth IRA

An Individual Retirement Account (commonly referred to as an IRA) allows individuals to “save money for retirement in a tax-advantaged way”.

• Roth IRA– Contributions are made with money you’ve already paid taxes on hence not deductible however- grows tax free with tax free withdrawals in retirement provided certain conditions are met. Typically, this is a strategy that is beneficial if you income and tax rate are lower now than you expect them to be in retirement. 
• Traditional IRA– Contributions may be tax deductible and earnings grow tax-deferred until you withdraw in retirement. 

IRA Contribution Limit: 6,000 in 2021 (7,000 if age 50 or Older)

This is a great way for small business owners who are just getting started to get their feet wet. Whether you choose a traditional or Roth IRA, the tax benefits allow your nest egg to potentially grow more quickly than in a taxable account. If you had a 401k with your previous employer- you can also roll your 401k balance into an IRA account. 

2. Solo 401k

A solo 401k is a retirement account designed for self-employed business owners without any full time employees.  

Tax Advantage: Business owners can make contributions both as an employee and as an employer. This method offers tax deductible contributions as the employer and elective deferrals reducing your personal taxable income for the year- with distributions taxed in retirement as ordinary income. 

Solo 401k Contribution Limit: Total Contributions cannot exceed $57,000 (in 2021). Check out the specific guidelines on the IRS site here.

A solo 401k is particularly a great option for small business owners who want to save a great deal of money towards retirement in some years and less in others because it offers that flexibility. 

Note, the IRS requires Solo 401k plan to file an annual report on Form 5500-EZ if it has more than 250,000 in assets at the end of the year. 

3. Simplified Employee Pension (SEP)

A Simplified employee Pension, also know as SEP allows employers to contribute to retirement accounts for themselves and their employees. 

Requirements: Employer must contribute equally for all eligible employers. Employees are not eligible to contribute to a SEP. 

Contribution Limit: The lesser of 25% of the employees compensation or 58,000 (2021)

In general SEP IRA’s can be easier to maintain for small business owners- as there is no annual reporting requirements to the IRS and also has the similar benefit of higher contribution limits. Similarly to a Solo 401k, SEPs are flexible in that you don’t have to contribute every year- so if cash flow is an issue this is a great option.

 

As you can see, there are a number of options available to small business owners when it comes to preparing for retirement. Definitely consider discussing what option would be best for you and your business with your CPA. If you need help making this assessment, this is another benefit I offer my clients as their Virtual CFO. Your business finances- really is more than monthly bookkeeping. If your desire is to build a build business that operates without you one day- I would love to discuss how to get there.