Building your own company takes some seriously hard work, but the work does not stop once you have become successful. If this company is your full-time career, you need to think about what you are going to do for your retirement plan.
The one major benefit inherent in working for someone else’s company is that they already have an entire retirement plan set up for you and all you have to do is check a couple boxes and sign your name. As your own boss though, you have to do all of the heavy lifting for yourself—and your employees, if you have them. Thankfully, there are some things that you can do to set up a retirement plan for your business and invest in success.
Saving for retirement is all about the end game, so before you think about retirement you should think about what you want for your company. Do you just want the company to cease to exist when you finally retire? Do you want someone in your family or a star employee to carry it on? Do you want to sell your company to the highest bidder? You may have spent your entire life building this from the ground up, so you owe it to yourself to figure it out long before you plan on retiring.
Types of Small Business Retirement Plans
In terms of options, there are quite a few retirement plans to choose from.
A SIMPLE IRA, is a savings incentive match plan for employees available to small businesses. For instance, an employer in 2015 was able to match up to 3% of an employee’s compensation or they could contribute 2% of an employee’s compensation of up to $265,000. Basically, that means that an employer was not able to contribute more than $5,300 for one employee.
If you are the only employee of your company (or if you do not wish to offer any employees retirement options), you can look into a Sole 401(k) for yourself and your spouse. The Self-Employed 401(k) requires more effort and paperwork than the others mentioned, because you will have to fill out a Form 5500 with the IRS if your assets are greater than $250,000 – if you don’t plan on making that much though, you don’t really have to worry about this yet. Plus, usually financial firms won’t charge you a maintenance fee and you will be able to contribute salary deferrals of $18,000. You will also be able to contribute a total of $54,000 (as of this year, that is). Plus, you will be able to designate funds as 401(k) funds and will not have to pay taxes on them until you reach retirement age. Like a regular 401(k), a Solo 401(k) will allow you to borrow from your retirement fund, but it will only allow you to take either up to $50,000 or 50% of the funds. Additionally, you will have to repay your account within five years with regular payments at a rate of interest.
A Simplified Employee Pension Individual Retirement Arrangement (otherwise known as a SEP IRA) may actually be the best option out there for a small business owner or anyone with any type of freelance income, especially for those without employees. Contributions (which are tax deductible for the business or person) are put into an IRA that is held in the employee’s name. The employees themselves do not contribute, the employer does. The money in a SEP IRA isn’t taxable until withdrawal and they hold an elevated contribution limit – for instance, you can contribute as much as $54,000 this year (though you have to contribute the same percentage amount to yourself and your employees).
Then there is a MyRA. This one is a good choice if you do not have any other retirement plan and you do not really expect to be contributing all that much to the account. You can open the account with as little as $25 and you really only need to contribute $2 at a time if you want. The major benefit? You will not be penalized for withdrawing money early – though you will have to pay taxes on the amount you withdraw. Another rule is that you will not be able to invest more than $15,000 in total.
Running a small business can be one of the most rewarding and trying experiences of your life. Making sure you set up the right retirement package for you and your employees can make sure it is also a fruitful endeavor for you and those who helped you make it all happen.