How to Fund Retirement as a Small Business Owner


As a small business owner, you’ve got a million and one things to juggle each day to keep your business growing and producing revenue. Thinking about retirement, and which retirement plans will work for you, is usually somewhere near the bottom of the to-do list.

However, understanding your retirement plan options as a business owner could not only help you save more towards retirement but also potentially lower your tax liability. As we roll around to the end of 2016, there’s no better time than now to consider your options and start building your savings.

Let’s Talk Tax Savings:

Let’s be honest, business owners are always looking for ways to save on taxes, and a retirement plan provides an excellent opportunity for savings and tax-deferred growth. There are seldom win-wins in life, but saving for retirement is one of them.

The three most popular retirement plans for small business owners, usually with 10 or fewer employees, are the Simple IRA, SEP IRA, and Solo 401(k). Each of these plans offers significant tax benefits to you as the business owner.

  • Potentially being able to deduct the employer contributions to your plan as a business expense
  • Tax-deferred growth potential on all of your contributions which will reduce current tax basis
  • If this is your first retirement plan that you’re offering, you might qualify for a tax credit of up to $500 for expenses to start and maintain your retirement plan for the first three years

Traditional Retirement Planning:

We’ve all heard of the 401(k) plan, but there are so many different retirement plans beyond the 401(k) that might be a better fit for you.

For instance, the number of employees that you have on payroll could play a role in which retirement plan you choose and whether you’re looking for a plan with simplicity or a plan to maximize your contributions.

Simple IRA: This plan is great if you employ fewer than 100 people per year. With this plan, you can save up to $12,500 per year if you’re under 50, and $15,500 if you’re over 50. You can also make a Simple IRA plan available to your employees and contribute to their accounts as a benefit. However, if you use a Simple IRA, your options for additional retirement plans are limited.

SEP IRA: Just like Simple IRAs, SEP IRAs are available to business owners and their employees, and are a popular option for small businesses with few employees. You can contribute up to 25 percent of your compensation, up to a maximum in 2016 of $53,000. With a SEP, you have up to the extended due date of your taxes to contribute for 2016.

Simple 401(k): In most ways, Simple 401(k) plans are identical to Simple IRAs. However, with a Simple 401(k), an account holder can take a loan against the account balance, which is not allowed under a Simple IRA plan. Just a few small differences, but could make an impact on your finances if you did need a loan from your retirement plan.

Solo 401(k): If you don’t have any employees, you might want to consider a Solo 401(k). This plan offers a higher limit for savings than a Simple IRA – up to $18,000 a year as your 401(k) contribution portion. You can also have your business make a tax-deductible contribution on your behalf of up to 25 percent of your compensation, with a ceiling of $53,000. If you’re over 50, you can make a catch-up contribution for $6,000.

One last option to consider if you are looking for higher contribution limits is a Defined Benefit Plan. These plans traditionally work best in small companies, under 50 employees, where there are income and age gaps between the owner and his/her employees. Defined Benefit Plans involve actuaries that number crunch to find the exact contribution limit for your business in any given year.

Consider Alternatives:

If the idea of setting up a retirement plan doesn’t get you all excited, you might also consider a couple of options like potentially selling your business or cash-value life insurance, which can play a valuable role in your retirement funding.

There are no guarantees when you rely solely on selling your business to provide for retirement income. You’ll need to make sure that you have your business “sale-worthy” before you shop around for a buyer. Also, you should look into having an appraisal completed on your business to prep it for sale. As the old rule says, your business is only worth what someone else is willing to pay for it.

Life insurance can also play a valuable role in your retirement funding. Many people assume that life insurance is only good for your beneficiaries, but that’s only half the story. Cash value life insurance, with policies like Whole Life and Indexed Universal Life, allow cash value build up in the policy that can be used to assist in funding your retirement. The cash value can be accessed at retirement or prior to retirement. Working with a financial advisor will ensure that you get the best policy to meet your retirement needs.

Whichever retirement option you choose, the end of the year marks a great time to set up and start funding your plan. Don’t rely on your business alone to provide enough cash to fund your retirement. Starting today will allow your retirement portfolio the chance to compound over many years, which means more opportunity for greater returns for your future.