Do I Need a Retirement Strategy For My Small Business?

by | Sep 1, 2021 | Investing

If you’re like many small business owners, you probably get caught up in the day-to-day management of the urgent. Unfortunately, that means your retirement plan, and the retirement options you set up for your employees, won’t be on your radar until it’s too late.

The Department of Labor estimates that most Americans need 70 to 90 percent of their current annual income to maintain their standard of living during retirement. Acquiring that money for yourself  – not to mention any employees who may be depending on you! – will take planning. Hit pause on playing whack-a-mole with urgent tasks so you can build a retirement strategy for yourself and your employees. In today’s ultra-competitive job market, you can’t afford not to.

Benefits of offering a retirement savings plan

Beyond preparing for the future, offering retirement benefits is one way to recruit quality employees. Contributing to a retirement account is an attractive incentive to candidates. Plus, small businesses that offer retirement savings plans have access to various tax breaks, depending on the type of plan, both for themselves and their employees. Common tax breaks include:

  • Employer contributions are deductible from the employer’s income
  • Employee contributions are tax deductible during the year the funds were allocated there
  • The money grown in the account is tax-free

As a business owner, what steps should you take to plan for retirement?

The first thing you should do is create an exit strategy for your business. What do you want to happen to it once you’re no longer in charge? Will a relative take the reins? If not, perhaps you have a current employee who might be interested in buying out your portion and running the company one day. Or maybe you’ll sell it to another business owner. Prepare for how this plan can shift if you need to leave sooner than planned due to your health or something else unexpected.

A special consideration for sole practitioners 

If you’re a high earning sole practitioner or business owner, a defined benefit plan can offer significant tax and income benefits. While it likely isn’t a viable option for the vast majority of business owners to set up for their employees, for owners who have high compensation and high business profits but no employees, this option can provide considerable tax savings and long-term financial benefits. Defined benefit plans can allow for higher pre-tax contributions than a 401(k) plan, but the administrative cost can be high. If you’re a consultant, sole proprietor, or practitioner, talk with your wealth advisor about if a defined benefit plan can help you maximize your retirement plan.

IRA and 401(k) options for small businesses with employees

If you don’t want to sell your business at retirement, but you need to maintain an income, you might want to consider setting up an IRA or 401(k) option for yourself and your employees. SEP-IRAs, Simple IRAs, Solo 401(k)s, and Simple 401(k)s are all viable options available to many small business owners. The best retirement plan offering for you depends on the size of your business and other particulars like number of employees, business revenue, and administrative capacity.

Setting up a retirement plan for your small business can seem daunting. But a retirement plan can benefit your business, your employees, and yourself – if started early enough.

Don’t wait. At Cook Wealth, our team is ready and willing to explore any of these options with you. Give us a call today so that together, we can make a plan that works for you.