How to Prepare for Retirement as a Business Owner
Being a business owner is exciting, but it also comes with a lot of responsibilities — including the preparation for your retirement, which is something you must handle directly.
Once you have your business up and running, you should start looking into potential savings plans. This will also allow you to find solutions for employees in the process. Join us as we look at some of the best strategies for business owners to start saving.
1. Developing Your Exit Strategy
While it may seem odd to begin your business with an exit strategy, it’s important to think ahead. As you start building up a small business, it will become a major asset for you later in life. When you’re ready to retire, you’ll need to stop working.
This means selling your investment, so you can move on to a relaxing retirement. Ideally, you will find a way to pass the business along to a successor who can run it in your absence. Start think about potential buyers.
Here are some options:
● Sell or transfer the company to a family member. The downside of transferring, is that you won’t get the capital from selling the business.
● Sell to an employee or co-owner. This allows for a flexible quick sale or a gradual change of leadership.
● If you have extensive records and reports, an IPO is a great exit strategy. It can be difficult to pull off, with a lot of potential snags in the process, but if possible it’s a solid strategy.
● Become a passive owner with potential to hand the company over or sell it at a later date.
You should decide if you want to keep a stake in the business or sell your ownership entirely when it comes time to retire. Since you’re thinking very far into the future with this plan, flexibility is important.
2. Planning for Your Retirement
Once you’ve nailed down your exit strategy, then next step is to think about how you’ll fund your retirement during the time you’re working for the company you own. Here are some options available to you:
Create a Simplified Employee Pension (SEP) IRA
This type of individual retirement account (IRA) is available to small business owners and employees. It allows for 25% of income up to $53,000 pretax contributions. Like a SIMPLE plan, this IRA allows small business owners to make tax-deductible contributions on behalf of eligible employees.
Employees won’t pay taxes on the amounts the employer contributes on their behalf until they take distributions when they retire. The SEP plan is something any small business can create. Each year, the employer can contribute any amount they like on the employee’s behalf.
This plan is a favorable one that allows for flexibility and larger contributions to the funds. That makes it a good fit for small businesses.
Start a SIMPLE IRA
Known as a savings incentive match plan for employees, a SIMPLE IRA allows employees for defer up to $12,500 of their salary pretax. Those who are over 50 can defer up to $15,500 because of a $3,000 catch-up contribution.
With this kind of IRA, employers can only contribute up to $18,000 per year. Employees can choose how they invest the money, and pay tax on distributions when they withdraw.
Other Options
If you’re not worried about offering retirement plans for employees, you can explore a few other options. If you’re simply saving for yourself, a Roth or traditional IRA could be the right fit. The nice thing about Roth IRAs, is the ability to contribute after-tax dollars and take tax-free distributions.
A traditional IRA lets you contribute pretax dollars, but you’ll ultimately pay on the distributions.
Conclusion: It’s Always Time to Start Saving
Small business owners need to start thinking about their retirement as early as possible. By planning out an exit strategy and establishing a retirement fund, business owners can get started right away.
Are you a small business owner? How are you planning for your retirement? Let us know in the comments!
