By Rick Hellberg, ChFC®, CLU & Michael Diaz
You’re a small business owner, and everything falls on you. You’re the captain of your own ship, and you love it even though it includes long nights, weekends, and holidays. You’re so busy making things run that sometimes you forget about yourself—specifically your retirement! Saving for retirement is one of the most important things you can do as a small business owner. You love what you do, but you have to retire someday.
The Business Is My Retirement Plan
Your business may be the biggest asset you own. Many business owners believe that the sale of their business will give them the funds to retire, without knowing what their business is worth or having an exit strategy. Your business can be a viable source for a full and happy retirement with the proper planning. Planning to sell your business to fund retirement requires planning well in advance, years before retirement, and creating a diversified strategy to solidify your business assets as the foundation for your retirement.
Traditional And Roth IRAs
You have plenty of choices regarding small business IRAs that can help reduce taxes with deductible contributions. Let’s start with the simplest way of saving, and that’s opening an IRA: traditional or Roth. If another plan does not cover you or your spouse, your contribution is deductible. For 2021, the limits are $6,000 for individuals and a $1,000 catch-up contribution. (1) Money is taxed when withdrawn, and if you take money out of your IRA before age 59½, you will incur a 10% penalty on top of the taxes you must pay.
A Roth IRA cannot be used as a deduction on your tax return because it is funded with after-tax dollars. The amount you can contribute to a Roth is based on income and can be confusing. We’ve included a link to an IRS website detailing the income limits. If you qualify to contribute to a Roth, your contributions to a traditional IRA and Roth IRA cannot exceed the limits stated above.
SEP IRAs are another vehicle small business owners can use to save for retirement. SEPs can be established if you have one or more employees, make employer contributions only, and the limits are 25% of the employee compensation or $58,000 for 2021. (2) All employees must be covered by the plan as long as they are 21 years or older and be employed by your business for 3 of the last 5 years, but you aren’t locked into making contributions every year. The contribution to your SEP does not affect how much you can contribute to a traditional or Roth IRA. Contributions are tax-deductible to employers, and limits differ if you are self-employed. You can find a detailed overview on the IRS website.
Solo 401(k) Or Self-Employed 401(k) Plans
If you are a contractor or sole proprietor, then this plan is a good option for you and your spouse if they are your only employee. You can make an employee deferral of 100% of your compensation or $19,500, whichever is smaller. If you’re 50 or older, you can contribute an additional $6,500. You can also contribute as the employer up to 25% of compensation, not exceeding $58,000 for 2021. (3) A solo 401(k) does not require a Form 5500 unless the account exceeds $250,000. You can deduct up to 25% of eligible compensation. (4)
We’re Here To Help
A third of small business owners do not have a retirement plan. That’s an astounding figure because there are 30,748,033 small businesses in the United States, and 51% of all small business owners are 50 or older. (5) If you don’t have a retirement plan, we can help set you up for a traditional or Roth IRA, SEP IRA or Solo 401(k), and several other types of plans that can help you save for retirement. Reach out to us at 610.940.1441 or firstname.lastname@example.org to set up a meeting to discuss your options.
Rick Hellberg is president and CEO of PeterAlexander, a financial planning firm founded in 1991. Rick is passionate about providing quality, objective financial solutions so his clients can pursue their financial goals and create the legacy they desire. He strives to equip his clients with comprehensive financial services and advice so they can be empowered to make sound financial decisions. The plans Rick and his team develop help their clients to reduce their taxes, educate their children, fund their retirements, pass their businesses on at fair value, and create programs to attract and retain valuable employees, all so that they can focus on what matters most to them. Rick has a bachelor’s degree in liberal arts from Penn State, along with the Chartered Financial Consultant® (ChFC®) and Chartered Life Underwriter (CLU) designations. He has spent over 40 years working with successful individuals and designs tailored solutions to meet his clients’ unique needs.
Rick resides in Philadelphia with his lovely wife, Lisa, and their two Shiloh Shepherds, Bentley and Winston. He is also the very proud father of two wonderful young men, Peter and Alex. In 2010, Rick ran for Congress in the 2nd District of Pennsylvania and has stayed active in local politics. To learn more about Rick, connect with him on LinkedIn.
Michael Diaz is a financial advisor at PeterAlexander with over 15 years of industry experience. Michael is passionate about helping people overcome financial challenges and avoid potential pitfalls so they can focus their time and energy on the most important things in their life. He spends his days working with successful business owners and families, implementing investment and tax reduction strategies to maximize their wealth. Michael’s goal is to help protect his clients’ financial security, putting them first and helping them navigate every stage in their financial journey. Michael earned his Bachelor of Science in Commerce and Engineering from Drexel University. When he’s not working, you can find Michael traveling, cheering on local sports teams, and exercising outdoors. Michael loves spending time with his wife, Abby, and their baby girl, Monroe. To learn more about Michael, connect with him on LinkedIn.