As a small business owner, you have a big decision to make when it comes to retirement. Should you reinvest profits back into the business or set aside cash for your retirement?
It’s essential to start saving early so your money can grow and benefit from compound interest. Moreover, it’s necessary to have a succession plan in place before you retire or sell your company.
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Build a 401(k) Plan
Offering a retirement plan to your employees can support you in recruiting and retaining the best talent. A 401(k) allows you to invest money on a pre-tax basis, and many companies also match employee contributions as an incentive to encourage them to save for their futures.
You’ll want to choose a small business owner retirement strategies and retirement plan that aligns with your business goals and values. There are several different types of retirement plans available, including traditional IRAs and Roth IRAs. Each has its tax benefits, and you’ll need to decide which one will work for your company.
A 401(k) is the best option for small businesses because it’s easy to set up and requires minimal administrative costs. The Society of Human Resource Management reports that 94 percent of employers offer some type of 401(k) to their employees.
If your small business has fewer than 100 employees, you can establish a SIMPLE IRA plan. It is less costly than a complete 401(k) plan and doesn’t require nondiscrimination testing. For self-employed people and small businesses with only one owner, a solo IRA is another option. It’s a simplified version of the 401(k), with lower setup fees and more straightforward documentation than a standard IRA.
Save in Tax-Advantaged Accounts
When you’re an entrepreneur, you get to define what retirement means. It may involve working less or selling assets, but it will require a consistent income that enables you to live according to your preferences.
That’s why it’s essential to build up your savings in tax-advantaged accounts as much as possible. It gives you more choices about managing your future income regarding retirement, depending on where you’ll draw from your investments and what taxes you’ll be required to pay.
For business owners, options include a SEP IRA and Solo 401(k), both individual retirement accounts where only the employer contributes funds. Employers can also open a SIMPLE IRA, similar to the SEP, but with fewer contribution limits.
Even if you don’t plan to retire from your small business, it’s still a good idea to save in these accounts. That’s because if you ever decide to sell your company in the future, it will need to be able to operate without you. This means that you’ll need to have a solid strategy in place that will help you find a buyer and prepare the business for sale. This includes getting a valuation of your company and looking for buyers several years before you intend to exit the business.
Create a Succession Plan
There is probably no one who works harder than a small business owner, and there is always something new to care for. However, the sooner an owner starts the succession planning process, the more time they will have to get it right before leaving the company.
Succession planning involves creating a plan to transfer ownership and leadership of a business to another party, often an employee or family member. But it can also be done with an outside buyer. It’s important to note that a successful business succession plan must be executed well for it to have value, and this process is often complex. It’s best to consult with a financial planner, lawyer, and business broker for assistance.
The most common option is to leave the company to a family member. This can be a great way to ensure continuity and maintain quality, but many questions need to be answered first, such as: Will the heir take over the entire company? Will they be able to afford it? Is there someone else in the family who would be a better fit for the business?
When family members aren’t a good fit, a company may choose to sell to an employee. This can be a great option as it allows for the continued stability of the business and the familiar faces that customers have grown to know.
Create an Exit Strategy
As a small business owner, you may have access to different retirement benefits than full-time employees do. Instead, you’re responsible for putting money aside in your retirement accounts. That’s why it’s critical to weigh your options for retirement planning for small business owners.
The first step is to consider when you’d like to retire. Then, you can decide how much profit to reinvest and how much to save to reach your goals. Once you have a clear plan, you must review your strategy regularly.
It’s also essential to determine how you’ll step away from your business. Some owners choose to sell their company to a third party or transfer ownership to a family member before they retire. Others choose to transition out of the business gradually. This might include reducing their time in the office or shifting their responsibility so that they’re only there for a month at a time or less.
Regardless of your approach, it’s never too early to create an exit strategy for your business. A financial advisor can assist you in creating a customized and effective strategy that aligns with your needs. Contact one of the experts at Choice Wealth to learn more or schedule a meeting today.