Too many business owners know they should save for retirement but put planning for it on the back burner. Forty percent of small business owners have no retirement savings or pension plan, according to a recent American College study, and some 75 percent have no written plan as to how to fund their retirement.
“Business owners shoulder the most responsibility for their businesses, yet often forget to pay themselves first,” says Jeff Manley, executive vice president, wealth services regional executive – Texas, at Cadence Bank. “But if they’re not taking care of themselves along the way, this can position them poorly for the future.”
Smart Business spoke with Manley about how business owners can plan for retirement.
What 401(k) plans suit business owners?
Small, medium and large businesses can use 401(k)s. These basic retirement plans work well for companies looking for a retirement plan that includes both the owner and employees. Making this more compelling is that the IRS raised contribution limits by $500 for 2013, making them $17,500 and $23,000 if age 50 or older, for the first time since 2008, boosting potential savings.
Individual 401(k)s and Uni-k plans are for sole proprietors, or one employee plus a spouse working for the business. These plans, which are similar yet with important differences, are the highest saving vehicles for individual business owners as they allow them to put money away on a pre-tax or after-tax basis, or a combination thereof. Business owners wear two hats — contributing $17,500 or $23,000 as an employee, and an additional 25 percent of income, up to a $51,000 maximum, as the employer. A trusted financial adviser can help determine which plan is best for you.
What IRA plans are available?
A traditional IRA is a tax-deferred retirement account, while a Roth IRA takes contributions after taxes. There are different theories on which is better for whom, with many business owners doing both. For 2013, both IRA types have maximum contributions of $5,500, $6,500 for those over age 50, so they can’t support a retiree.
A self-directed IRA is a tax-deferred account that allows creative, nontraditional investing such as private equity and real estate. Normally, IRAs only invest in securities registered with state or federal authorities. However, self-directed IRAs have a lot of regulations and not all investment advisers provide them.
A Savings Incentive Match Plan for Employees (SIMPLE) IRA, working like a traditional IRA, has relatively small contribution limits — $12,000 for 2013, with catch-up contributions of $2,500 for those over 50. Employees can get up to 3 percent company match. Although this doesn’t allow for much annual savings, it’s less expensive to administer than others.
A Simplified Employee Pension (SEP) IRA is a type of traditional IRA. The employer is the sole contributor, and the contribution must be an equivalent percentage for every employee. The 2013 contribution limit is 25 percent of a person’s salary, up to a maximum of $51,000 per employee. This plan works well with family-run businesses.
How much should be saved for retirement?
With the different contribution limits, the amount that can be saved annually varies dramatically — from $5,500 to $51,000 in 2013. Those early in their career should start saving now and try to max out the percentage they put away each year. Getting compounding earnings working early means more money in the future.
The general rule is to save 10 to 15 percent of annual income in retirement-type savings vehicles. But those earning a good living now who want to continue their lifestyle through retirement may have to save millions. Ask a financial adviser about available options to understand what will work best for you. Retirement planning isn’t something that can be put off. Business owners need to weigh their options. ?
Guidance provided in this article is educational in nature, is not individualized, is not intended to provide legal or tax advice, and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions. You should consult with an attorney, tax or other qualified professional for specific advice regarding your unique circumstances.
Jeff Manley is executive vice president and wealth services regional executive – Texas at Cadence Bank. Reach him at (713) 871-3931 or firstname.lastname@example.org.
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