Savings and Retirement Plans for Entrepreneurs and Small Business Owners

Tuesday, August 2, 2011 at 5:54pm by Site Administrator

By Eliza Morgan

If you are an entrepreneur or small business owner, you are the one who’s in control regarding your financial future.  There is no one else to rely on when it comes to saving and planning for the future, so you must take on this matter yourself.  The thing is many traditional savings and retirement plans are unavailable to you due to income limitations.  Here are a few savings options for entrepreneurs and small business owners.

 

Solo 401(k)

A solo 401(k) plan is a great alternative to the traditional 401(k), and was created for self-employed individuals, entrepreneurs, and small business owners with no full time employees.  The only exception to this is if the small business owner’s spouse is an employee.  Solo 401(k) plans have simplified administrative rules, unlike their traditional counterparts.

The advantage of a solo 401(k) is that it is simple to use and maintain.  You may contribute up to $13,000 of tax-deferred income, in addition to up to 25% of profit from your business.  As long as you contribute no more than $41,000 annually, you fall within the limits of the solo 401(k).  The amount you contribute to a solo 401(k) is completely discretionary and can be decreased or suspended at any time.  Additionally, loans against your plan, as well as hardship withdrawals may be allowed.  Rollovers from previous 401(k) plans are allowed as well.  

There are a couple of drawbacks to the solo 401(k).  Naturally, there is a cost to establish and administer a solo 401(k), which may or may not be desirable for the individual investor.  Solo 401(k) plans may not ultimately end up meeting your needs for you and your business.  If your business grows, you may end up needing to hire on additional full-time employees.  When this happens, you are no longer eligible for a solo 401(k), and must revert to a traditional 401(k), which is far less simple to administer.

SEP IRA

An SEP IRA, or Simplified Employee Pension Individual Retirement Account, is a savings and retirement tool that can be used by both small business owners and self-employed people as well.  SEPs are considered part of a profit sharing program, and the employer may contribute up to 25% of a qualifying employee’s income to the fund.

SEPs are affordable and simple to administer, and is an excellent benefit to provide to employees.  If an individual is self employed, they are still able to put aside a little over 18% of their net profit, which is a powerful savings tool indeed.  Contributions to the plan are tax deductible, and standard income tax applies to the money once it is withdrawn for retirement use after the investor reaches age 59½.  Additionally, its high contribution limits make it very attractive ($46,000 in 2008).

One of the drawbacks of this type of retirement plan is that it is seen strictly as a profit-sharing plan, so employees must have another savings vehicle if they wish to put more money away on their own.  There is no catch-up payment clause for those who started saving later in life, as there is with the solo 401(k).

SIMPLE IRA

Savings Incentive Match Plans for Employees (SIMPLE) IRAs are fairly simple to administer, no-hassle IRA plans that offer a great benefit for employees in your small business.  Recommended for businesses with 10 or fewer employees, it s a great savings tool to offer for employees, and benefits both parties in the process.

SIMPLE IRAs allow employees to contribute up to $10,500 of their annual income to the plan.  Employers match this amount as part of the process.  Employees are then vested and are eligible to receive this money upon reaching retirement age.  Contributions are tax deductible.

For business owners, the drawback of this type of account is that the employees doesn’t have to earn his or her vesting, but is vested once the account is opened.  That means matching someone dollar for dollar who may not be around to help you grow your company may not be a sound investment.  SIMPLE IRAs are also very strictly administered and cannot be rolled over, nor can a traditional IRA or 401(k) be rolled into a SIMPLE IRA.

SOLO DB Plan

This plan is a slimmed-down version of a standard defined benefit plan.  If you are looking to save a whole lot of money over a short period of time and have the resources to do so, this is the plan for you.

Like other retirement plans, contributions are tax-deferred and the money is available to you once you reach retirement age.  These plans are very popular with people in business for themselves who are over 50 years of age, due to the ability to save vast amounts of money in a short period of time in order to meet future income requirements for retirement.

The drawback for this type of retirement account is that investors must be willing and able to contribute ongoing mandatory contributions of at least $45,000 for five consecutive years to keep this plan going.  For many, this amount of money is simply not possible.  For the well-compensated small business owner or entrepreneur, however, this account could be just perfect.

 


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