Small business owner retirement strategies can vary significantly from the retirement strategies recommended to those who don’t own a business. As a small business owner, you have a lot of things to consider when planning for retirement: you’re responsible for your own retirement savings, the type of retirement planning options you provide to your employees, and the continued health and success of your business.
Although small business owners are used to doing it all, the complexity of strategizing for retirement and planning for the future of your business can often be too much for one person to handle. In that spirit, the fiduciary financial advisors at Avidian Wealth Solutions are here to share some retirement tax strategies and investment strategies for small business owners to take advantage of.
How do you retire when you own a business?
Whether you put off planning for retirement because you’ve been busy scaling your business, or you feel responsible for the future livelihood of your small business and its employees, small business owners don’t often think about retirement until it is too late to prepare.
Retiring after owning a business is a delicate balancing act that requires careful planning and consideration. It can be difficult to transition control of the business, especially after you’ve invested so much time and energy into it. To that sentiment, it can also be challenging to choose the most tax-efficient way to help your employees and successors take over. Letting a trusted financial advisor help with your small business retirement planning can keep your mind where it belongs, whether that be on the business or on your upcoming Alaskan fishing trip.
Three of the most important things that you can do to set you and your small business up for a successful retirement include:
Decide what your goals are after leaving your small business
The first step in developing a strong retirement strategy is taking a look at where you want to end up. Because a small business owner’s retirement plan will depend entirely upon their goals and their assets, you’ll want to think critically about what the future looks like for both you and your business.
Some important questions to ask yourself about where you want to end up include:
- What do your revenue streams look like during your retirement?
- Will you be making large changes to your cost of living?
- Have you accounted for inflation, market instability, and unforeseen expenses?
- Are there hard deadlines on when you plan to retire?
- Who will take over ownership and operations of the business upon your departure?
Consider the allocation of your business, assets, and investments
Your business is likely one of your largest assets, and whether you are planning on liquidating it to fund your retirement or prefer to transition the business to family or staff members, you should be looking into diversified retirement investments outside of your business to protect and grow your retirement income.
While you may not have access to employer-sponsored 401(k) plans, as you are the employer, there are other retirement accounts you can use as a tax-incentivized way to plan for your retirement and help your employees do the same. More on this later.
Ideally, your assets should be allocated at per your preferred level of risk, but also remain positioned to take advantage of the market whenever possible. A balanced portfolio that utilizes various investment vehicles, is typically the best and safest approach to retirement income planning.
Some popular safe investments for retirement include:
- High-yield savings accounts
- Treasury bonds, notes, and bills
- Money market accounts
- Fixed annuities
- Certificates of deposit
Have a formal succession plan in place
It may be difficult to think about exiting a business that you have spent your life building, but regardless of whether you are planning to sell the business or pass the torch, business succession planning is the only way to make sure a smooth transition or sale can be made.
Your financial advisor can work with your existing legal team to predict market conditions and incorporate flexibility into your retirement plan in case things don’t go the way you hoped. Your formal exit strategy should help you prepare your business for all scenarios so that you don’t end up selling it for less than it’s worth, passing it on into the wrong hands, or leaving its future unplanned for if something were to suddenly happen to you.
Give consideration to any tax implications
Once you have your plan in place, it is important to start thinking about the tax considerations associated with retirement from a business such as capital gains taxes and estate planning taxes.
Additionally, you will need to plan for your retirement income by evaluating available options such as selling the business, taking out a loan against the business assets, or setting up an arrangement to receive payments from the new owners.
Selling all or part of a business can lead to significant tax bills, so it is vital to understand the implications of each option in order to mitigate your tax burden. Consider consulting a financial professional or lawyer who can help you understand how any retirement plan will affect your taxes.
Types of retirement plans for small business owners
Small business owner retirement strategies are largely based on the retirement plans themselves. There are many small business retirement plan options available to meet different long-term goals and business types. So, what type of retirement plan is best for self-employed individuals? What type of plan would better suit a company with fewer employees? What about plans if you are the only employee?
We’ve listed some of the most common small business owner retirement plans as well as their benefits below.
Simple IRA for small business owners
Simple IRAs can often function as small business alternatives to 401(k)s. They allow both you and your employees to make tax-deferred contributions to your retirement accounts and may be the right choice if your business employs less than 100 people. If you choose a simple IRA model for your small business, you’ll be given two choices for matching employee contributions. You can either:
- Match 2% of each employee’s compensation at the end of the year, or;
- Match the contributions the employee makes to their IRA up to 3% of their yearly compensation.
Both of these contribution types are tax-deductible on your end and offer employees potential tax savings. You also have the option to make contributions to your own account while still funding your employees, helping you to save for retirement and expand your employee benefits package.
An SEP IRA, or simplified employee pension account, is just as simple as it sounds. An SEP IRA allows employers to contribute up to 25% of the employee’s total compensation toward a retirement account, or up to 20% for the self-employed.
Unlike most retirement accounts, this type of small business owner retirement plan doesn’t require any type of matching and is ideal for businesses with fewer than 25 employees. They’re also easy to set up and maintain, as they don’t require any annual set-up or filing fees.
Solo 401(k) plans are not only a great option for self-employed individuals and are one of the best retirement plans for small business owners with no common law employees in C corporations, S corporations, or LLCs.
Also known as i401(k)s or individual 401(k)s, solo 401(k)s offer the best of both worlds by allowing business owners to invest as both an employer and an employee. Plus, the amount you can contribute each year is much higher than it is with an IRA or SEP IRA.
While traditional 401(k)s were originally designed for larger companies, they now are available to many small business owners and their employees. A traditional 401(k) plan can be a great option for small businesses with multiple employees because they offer a variety of investment options that can help business owners lower their income tax bill.
Both employer and employee can benefit from a traditional 401(k) by setting themselves up for retirement and saving in end-of-year tax payments. They also provide business owners with the ability to make larger contributions on behalf of their employees and can be used in conjunction with other retirement plans.
Small business owner retirement strategies and planning at Avidian Wealth Solutions
As a small business owner, retirement strategies can make or break what happens to you and your business after you transition into the next phase of your life. However, without proper planning, you leave the future of your business and your finances up to fate.
If you’re unsure of how to approach your small business retirement planning or need to review your current plan, Avidian Wealth Solutions can tailor a retirement strategy to you and your business’s unique needs, providing a sense of security that will allow you to enjoy your well-earned retirement.
We are a fiduciary wealth management firm offering retirement planning and tax reduction strategies for high-net-worth individuals, families, and business owners. Our team was built to help you work toward your financial goals and we look forward to the opportunity to help you do just that.
Schedule a meeting with us today to learn more about how we can help your small business plan for retirement!
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