7 Small Business Retirement Saving Strategies
August 9, 2022
Learn about strategies small business owners can use in their companies.
Each small business owner’s situation is different. As a small business owner, you have complete control over your retirement savings planning. If you are on the other side of 40, own a small business, and looking for small business retirement savings strategies do not despair. It is not as intimidating as it sounds. Moreover, one of the top priorities is paying less tax, through effective tax planning, it will help you minimize your tax liabilities & use the money to generate income & adjust your cash flow. Of course, doing your bookkeeping effectively, will help you understand where you are in terms of profitability.
Let’s talk about 7 strategies small business owners can use for retirement savings.
1. Invest in a SEP IRA
The first one of the small business retirement savings strategies is to consider a SEP IRA. It stands for Simplified Employee Pension plan.
Opting for SEP IRA lets you pack a huge check for yourself compared to what you get with a traditional IRA. You put money into your SEP depending on your earning. With that, IRA has limitations for business owners below 50 years, restricting them to only $6,000.
You are allowed to do up to 25% of your earnings with SEP.
If you are looking for easy small business retirement savings strategies, SEP IRA is one of the best as you do not need a third-party administrator. However, things can get a bit complicated for small businesses with 10 or more employees, so it makes sense to hire a plan administrator for your ease.
2. Establish SIMPLE IRA
With a SIMPLE IRA, employees can put off or defer up to almost $13,500 of their salary, pre-tax. In case you are 50 years old or above, up to $16,500 can be deferred. It can be done by taking the benefit of a $3,000 catch-up contribution.
If employees are participants in other employer-sponsored plans, they cannot contribute over $19,500 in all plans combined.
If your business has 100 or fewer employees, you are allowed to set up a SIMPLE IRA. For sole proprietorship businesses, the proprietor is both employee and employer. This makes all your net income-eligible for investment in your SIMPLE IRA.
3. Solo 401(k)
Since 2001, Solo 401(k) has become a popular retirement savings plan for small business owners. It offers more flexible choices compared to some other available plans. It is also called a self-employed 401(k).
If you are older than 50, you can contribute up to $7,000, otherwise only up to $6,000. However, the solo 401(k) annual contribution limit is $58,000. Those at least 50 or older can take advantage of a $6,500 catch-up contribution.
What makes it one of the best strategies is its tax effectiveness and specificity to small business owners. In addition, it offers all the benefits of a self-dedicated IRA with more benefits as well.
4. Cash Balance Plan (Complement other retirement plans too)
A Cash Balance Plan is an IRS-qualified retirement plan. It supports small business owners and helps them realize tax deductions and savings rates up to 4x higher than a 401(k) plan.
People between the 45-65 age range can benefit from it the most because it allows for a very high contribution for retirement savings and tax-deferral. If you have a small business and a high income from self-employment, the Cash Balance Plan makes a solid option for you.
You can layer this plan with a solo 401(k) and work in conjunction. You can figure out the best options according to your needs by working with a tax professional.
5. Traditional or Roth IRA
Setting up an Individual Retirement Account or IRA works best for small business owners looking to save no more than $6,000 a year. A traditional IRA allows business owners to grow pre-tax dollars. You keep adding these dollars, and they grow tax-free. When you reach the age of 59, the savings are taxed as income.
The other option in IRAs is setting up a Roth IRA plan. It lets you grow taxed dollars as tax-free dollars while they are in the account. Then, once you reach the age of 59, you can withdraw these dollars as tax-free.
You can opt for contributing to both a traditional and a Roth IRA—if you can. It lets you grow both tax-free and taxable savings. It is called tax diversification and is a smart strategy for small business owners that are unsure about what their tax picture will be like when they retire.
6. Defined Benefit Plan
This type of plan is appropriate for small business owners that are self-employed, have a high income, and do not have any employees. As a result, you can set aside a lot more money for retirement than your typical IRA or 401(k).
A Defined Benefit Plan requires you to make it large enough to provide the required annual payment upon your retirement.
Employee benefits you receive in a Defined Benefit Plan are calculated depending on various factors, including employment duration and salary history.
You can either hire a business responsible for managing a plan’s investment or hire a wealth manager.
7. Diversify your investments (use more than one plan)
One of the wisest pieces of advice any investment or financial savings expert can give you is to diversify your investments. You can save your investment from the impact of an economic crisis by having a diversified portfolio.
They say, “never put all your eggs in one basket.” It is truer when it comes to a retirement savings plan for small business owners. So even if you have already launched a SEP or SIMPLE IRA, do not hesitate to open your own IRA—whether traditional or Roth.
The right Business Retirement advice
It’s never too early to start thinking and planning for retirement. Chat with us about the financial options available to you.
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