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Retirement

As you focus on the many day-to-day aspects of running a business, it can be easy to lose track of planning for your future. But, every business owner needs a retirement plan to help ensure a secure financial future for themselves and their children once their working life ends. According to a 2017 survey by Manta, 34 percent of entrepreneurs don’t have a retirement plan. Many put every cent back into the business and others plan to pay for retirement by selling their business. Many also overestimate the value of their businesses and the ease in selling them. However, these approaches can leave business leaders without the means to retire as planned because the value of a business may change over time.

Retirement

Luckily, starting a retirement plan for yourself and your employees doesn’t have to be difficult. These tips will help you choose a plan and start saving now, no matter where you are in the life cycle of your business. The benefits are big, including tax breaks, earning interest or compound returns on your retirement savings, attracting and keeping top-quality employees, and enjoying greater peace of mind.

What is a retirement account?
A retirement account is a type of investment vehicle where participants contribute an amount of their choosing up to a defined limit. Depending on the type of account they choose, the funds are then placed in stocks, bonds, mutual funds, real estate or other investments. Some of these investments, like bonds, may earn interest, and others, like stocks, may increase in value and pay dividends (sums paid regularly by a company to its shareholders). The purpose of opening a retirement account is to save money for retirement, earn returns on your savings and enjoy tax advantages.

How to plan for your own retirement
The best time to start planning for retirement is now. The earlier you begin saving, the more your money can grow over time. With some types of accounts, this growth is the result of compound returns. Compound interest, which Albert Einstein called the eighth wonder of the world, is the interest you earn on both your original investment and on the interest you’ve accumulated. In a nutshell, it means earning interest on your interest. For example, if you deposit $500 in a compounding account and save another $100 per month, your savings will grow to $48,394.84 in 20 years, assuming your investment earns an annual interest rate of 6 percent. Compound returns is one reason it’s so important to start saving as early as possible.

Now that you know why to save, here are simple steps to follow as you build your retirement plan.

1. Figure out how much to save

Most experts recommend saving 10 to 12 times your current annual income in total before you retire. Keep in mind that how much you need to save will also depend on how much you’ve saved already, the type of lifestyle you want after you retire, how long you expect to live, your overall health and the age when you want to retire. Whatever your target, experts recommend contributing 12 percent to 15 percent of your gross earnings (what you make before taxes) to your retirement account each year.

You can use this online calculator to help calculate your target number. Once you have a figure, determine how much you’ll need to contribute to your account each month to meet your goal. Setting up automated contributions can keep the process simple.

2. Choose the option that’s best for you and your business

Choosing the best type of retirement account for you and your employees can feel like a daunting task. Start by learning about the types of accounts available and consider speaking to a financial or tax advisor about which option may be best for you.

Traditional versus Roth accounts
Before diving into specific plans, it can be helpful to learn about some of the basic differences between the two main types of accounts: traditional and Roth. Within each of these two types of accounts, there are options designed for business owners without employees and options for business owners who want to provide retirement benefits for themselves and their employees.

Traditional
With a traditional account, such as a traditional 401(k) or IRA, contributions are tax-deductible on state and federal income tax returns for the year the contribution was made. This means that your contributions (up to the limit) can be deducted from your taxable income, lowering your tax bill and helping you qualify for tax incentives like student loan interest deduction. The account is tax-deferred, meaning that you pay taxes on the funds at ordinary income or capital gains tax rates when you begin withdrawing money from the account before or after retirement.

You can begin withdrawing funds penalty-free at age 59½. If you withdraw money early, you may have to pay a 10 percent penalty on the withdrawn amount in addition to the taxes due. There are some exemptions that allow you to make penalty-free early withdrawals from an account other than a 401(k). These include buying a first home, paying for qualified higher education expenses and paying health insurance premiums while unemployed. Note that you may still need to pay income tax on the money. For specifics, see the IRS website.

With a traditional account, you must begin withdrawing funds by age 70½ or you’ll have to pay a 50 percent penalty based on the amount you should have withdrawn.

Roth
With a Roth account, such as a Roth 401(k) or Roth IRA, you don’t get tax breaks for contributions and the account is funded with income on which you’ve already paid taxes. For this reason, you don’t pay taxes when you begin withdrawing funds. Roth account contributions (but not earnings) can be withdrawn penalty-free and tax-free at any time, even before age 59½. If you withdraw earnings from your Roth account before age 59½, just be aware that you may face certain taxes and penalties. There are exceptions, such as earnings withdrawn to pay for a first home, qualified education expenses, and unreimbursed medical expenses if you are unemployed.

To find out more about the types of Roth accounts available, see below and review the Roth comparison chart on the IRS website.

Contribution limits in 2019
As you consider which plan is best for you and your employees, it’s wise to keep in mind how much you’d like to be able to contribute to your plan each year, as each account has specific limits for both individual and employer contributions.

Note that an individual can contribute to both an employer plan and a personal IRA up to the applicable combined limit for each account type. For example, the 401(k) limit applies to total contributions between a traditional, Roth, or mixed account. The same goes for a traditional or Roth IRA.

If an employer plan includes a matching incentive, experts suggest contributing at least up to the amount that captures the full match available. Individuals can then consider funding a personal IRA for additional flexibility before making additional contributions to the employer plan.

Simultaneously funding an individual taxable account can help to support additional flexibility and short-term goals prior to retirement, or as an additional investment vehicle once contribution limits are reached in tax-advantaged accounts, since there is no age restriction for withdrawals in a taxable account.

Following are the limits for 2019. See the chart below for overviews and additional information about each of the plan types.

Plan type Employer contribution limit1 Employee contribution limit2 Maximum total contributions (under age 50)3 Catch-up contribution limit over 504
Solo 401(k) Up to 25 percent of compensation, up to a maximum of $56,000 100 percent of income up to $19,000 $56,000; this limit is for all of your combined 401(k) accounts Additional $6,000
Group 401(k) Up to 25 percent of eligible employee compensation, up to a maximum of $56,000 100 percent of income up to $19,000 $56,000; this limit is for all of your combined 401(k) accounts Additional $6,000
Simple 401(k) Up to 25 percent of eligible employee compensation, up to a maximum of $56,000 100 percent of income up to $19,000 $56,000; this limit is for all of your combined 401(k) accounts Additional $6,000
Traditional IRA N/A Up to $6,000 $6,000 Additional $1,000
Roth IRA N/A Up to $6,000 $6,000 Additional $1,000
Roth 401(k) Up to a maximum of $56,000 Up to $19,000 $56,000; this limit is for all of your combined 401(k) accounts Additional $6,000
Solo Roth 401(k) Up to 25 percent of your net self-employment income, with a $56,000 max Up to $19,000 $56,000; this limit is for all of your combined 401(k) accounts Additional $6,000
Simple IRA Either match employee contributions up to 3 percent of compensation (can be reduced to 1 percent in any two out of five years) or contribute 2 percent of each employee's compensation up to $5,600 Up to $13,000, depending on employer contribution $13,000 plus the maximum employer contribution Additional $3,000
SEP IRA Up to 25 percent of the employee’s annual compensation Up to $6,000 $56,000 Additional $1,000
Defined Benefit Plan An amount calculated by an actuary not to exceed 100 percent of the participant's average compensation for his or her highest 3 consecutive calendar years, or $225,000 N/A $225,000 N/A

1. This is the maximum amount the individual account holder can contribute each year.
2. This is the maximum amount the employer can contribute to the account each year.
3. This is the total cumulative amount the individual and employer can contribute to the account in a given year. This limit applies to account holders who are under age 50; limits are generally higher for those 50 and older.
4. Once account holders reach age 50, they are often able to make additional contributions to their retirement accounts beyond the usual limit; these are called catch-up contributions.

  • Self-Employed (Solo) 401(k)
    For self-employed people without employees

    Implications for employers

    A self-employed 401(k), also called a solo 401(k) or i401(k), is for self-employed people without employees who just want retirement coverage for themselves; it also applies to self-employed people with a business partner or spouse who is a partial owner. There are no income or age restrictions for contributions, and you can contribute to both a 401(k) and a traditional or Roth IRA at the same time. Note that, if your plan assets come to equal $250,000 or more, you’ll be required to file Form 5500 with the IRS. This form captures details about plan contributions, investments and operations; it must be completed annually by employers offering certain retirement plans.

    Implications for employees
    Solo 401(k) plans are only available to self-employed individuals without employees. You can’t open this type of retirement account if you have employees.

    See the contribution limits for this type of plan.

    For more on Solo 401(k)s, visit the IRS website.
  • Traditional (Group) 401(k)
    For employers with any number of employees who want to provide retirement benefits to their staff

    Implications for employers

    Employers with any number of employees can help their staff save for retirement by offering a Traditional Group 401(k). This type of plan gives flexibility to employers, as they can choose whether or not to contribute to employees’ accounts. Many companies offer to match a portion of their employees’ contributions to incentivize employees to save. You can also offer profit sharing, where you contribute to the plan based on your company’s profits for the year. Whatever amount you contribute will be tax deductible for your business.

    There is some administration required of employers providing a 401(k) plan, although most business owners hire a company to handle the task. They can manage details like creating a trust for the plan’s assets, providing plan details to employees and conducting tests to prove that the plan benefits all employees. These tests, called nondiscrimination tests, help ensure that companies are meeting federal regulations around employee eligibility, contributions and benefits.

    Note that one variation of the group 401(k) is called the Safe Harbor Plan. This is a special kind of 401(k) that does not require employers (or the company administering their plan) to do nondiscrimination testing. It also helps employees save by requiring companies to contribute to their employees’ 401(k) plans.

    Implications for employees
    Employees can save funds for retirement in a Traditional Group 401(k) if the plan is offered by their employer. Employees should check with their individual employer to see whether contributions are matched, as matching is not a requirement.

    See the contribution limits for this type of plan.
  • Savings Incentive Match Plan for Employees (SIMPLE) 401(k)
    For employers with 100 or fewer employees

    Implications for employers

    This is a special type of 401(k) plan just for business owners with 100 or fewer employees. This plan gives you a two-year grace period if you exceed 100 employees to allow for growing your business. Under a SIMPLE 401(k) plan, an employee can choose to contribute to their account. Employers are required to either match each employee’s contributions dollar-for-dollar (until the match is worth up to 3 percent of the employee’s annual salary) or make contributions worth 2 percent of each eligible employee’s annual pay.

    Also note that employers can’t offer other retirement plans for their employees along with a SIMPLE 401(k), and the company managing your plan will need to file Form 5500 for you each year.

    Implications for employees
    To be eligible to participate in the SIMPLE 401(k) plan, employees may be required to have been with the company for at least one year and be 21 or older.

    See the contribution limits for this type of plan.

    For more on each of these 401(k) options, take a look at the IRS publication,
    401(k) Plans for Small Businesses.
  • Traditional Individual Retirement Account (IRA)
    For employers or employees under 70½ with earned income

    Implications for employers

    A traditional IRA allows individuals to direct their pre-tax income to investments; earnings and gains aren’t taxed until the money is taken out. If you are younger than 70½ and have earned income, you can contribute to a traditional IRA. Traditional IRA contributions may be tax-deductible on both state and federal income tax returns depending on your income for the year. The deduction can lower your taxable income, which may help you qualify for other tax incentives.

    Implications for employees
    Any employee with earned income who is younger than 70½ can also contribute to their own traditional IRA. This type of fund is not employer-sponsored, but an employee can contribute to it in addition to their employer-sponsored plan. Like other IRAs (with the exception of Roth IRAs), traditional IRAs require you to begin withdrawing funds beginning at age 70½.

    View the contribution limits for this type of plan.

    See what the IRS has to say about the types of IRAs available and determine which could be best for you.
  • Roth IRA
    An IRA for individual business owners or employees

    Implications for employers

    A Roth IRA is an account that enables business owners or employees to contribute to their own retirement; it is not an employer-sponsored plan. A business owner who earns income but makes less than $137,000 per year ($203,000 if married and filing a joint tax return) can save for his or her own retirement in a Roth IRA. Unlike traditional IRAs, Roth IRAs don’t require withdrawals during the owner’s lifetime, making them a great way to pass on wealth to family members if you can live on other retirement income.

    Implications for employees
    Employees who make less than $137,000 per year ($203,000 if married and filing jointly) may want to contribute to a Roth IRA in addition to another, employer-sponsored retirement plan, such as a 401(k). Having both plans may enable you to contribute more to retirement than you could with just one type of account, and a Roth may offer more investment options than an employer-sponsored plan.

    See the contribution limits for this type of plan.

    Read more details about Roth IRAs on the IRS website.
  • Roth 401(k)
    An employer-sponsored plan for employees

    Implications for employers

    A Roth 401(k) is an employer-sponsored retirement plan that brings together the high contribution limits of a 401(k) with some of the tax advantages of a Roth account. More employers offer a traditional 401(k) than a Roth 401(k) because the Roth account tends to require more administrative upkeep. Unlike employee contributions to a Roth 401(k), any contributions made by the employer are placed in a traditional 401(k) plan and are taxed when the funds are withdrawn.

    Implications for employees
    Employees can participate in a Roth 401(k) no matter how much their income. A Roth 401(k) can be a wise choice for those who expect to have a higher tax rate in retirement than they do now. This is because the individual won’t have to pay income taxes on contributions or earnings when they withdraw money from the Roth 401(k) later. The tax-free income gives the owners more options in retirement.

    See the contribution limits for this type of plan.
  • Roth Solo 401(k)
    An individual plan for business owners without employees

    Implications for employers

    The Roth Solo 401(k) is a plan for business owners without employees. It offers many of the same benefits of the solo 401(k), with the tax benefits of a Roth IRA.

    Implications for employees
    This type of account applies only to business owners, not to employees.

    See the contribution limits for this type of plan.
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA
    For business owners with fewer than 100 employees who want to contribute to every employee’s plan

    Implications for employers

    This is a retirement plan for business owners with fewer than 100 employees who want to contribute to every employee’s retirement plan. It requires the employer to match the employee’s 3 percent contribution or contribute 2 percent for every employee (even if the employee doesn’t contribute to the plan). This plan gives employers a two-year grace period if they exceed 100 employees to allow for a growing business. Note that employer contributions for the SIMPLE IRA and SIMPLE 401(k) are subject to different rules. See the contribution chart above for details.

    Implications for employees
    This plan offers all the benefits of a traditional IRA along with employer matching. The overall contribution limit for a SIMPLE IRA is lower than for a SIMPLE 401(k), something to keep in mind if you’d like to contribute more than $13,000, plus employer contributions, in a given year. Account holders have the option to roll their cash into a traditional IRA two years after they first contribute to the account.

    See the contribution limits for this type of plan.

    You can find out more about the requirements and benefits of the plan on the IRS website.
  • Simplified Employee Pension (SEP) IRA
    For small business owners with less than 100 employees

    Implications for employers

    This type of retirement plan is for small business owners with less than 100 employees. With a SEP IRA, only the employer contributes to the plan, although employees can also save for retirement in their own IRAs. If you have eligible employees (meaning they are 21 and older, have worked for you three of the last five years and have earned at least $600 from you in the past year), you must contribute the same amount to their plan as you do to yours.

    Implications for employees
    As with other traditional retirement accounts, SEP IRA contributions are tax-deductible, and investments grow tax-deferred until retirement.

    View the contribution limits for this type of plan.

    See the IRS website for more details on SEP IRAs.
  • Defined benefit plans
    A traditional, employer-sponsored pension plan

    Implications for employers

    With a traditional pension, the employer is responsible for making investment decisions and managing the plan's investments, so he or she assumes all the investment risk. This traditional pension plan offers a clear annual benefit that each employee receives at retirement, usually based on a formula that takes into consideration salary and years of service. Contributions are calculated by an actuary based on the benefit you set and factors like an employee’s age; no other annual contribution limit applies. An employer can generally deduct contributions to the plan from their taxes.

    Employers are required to file Form 5500 with a Schedule B each year, and to rely on an actuary to set funding levels. Note that companies can’t decrease benefits retroactively, and they must pay federal excise taxes if they don’t make minimum contributions to the plan. The minimum required contribution for each year depends on whether the value of plan assets equals or exceeds the plan's target for that year.

    Implications for employees
    Defined benefit plans provide a fixed, pre-established benefit for employees, which many employees value. This type of plan also allows for larger contributions than an IRA or 401(k). Contributions are tax-deductible, so employees won't owe tax on contributions until they begin receiving money from the plan.

    See the contribution limits for this type of plan.

    For more details, visit the IRS website.

With any of the above plans, it’s a wise idea to research employee requirements (like informing employees of the plan and completing important IRS paperwork). You’ll also need to research brokers, finding the one with fees and services that fit your business. As with all important financial decisions, it’s best to consult a financial advisor and a tax professional to ensure you’re making the best decision for yourself and your business.

3. Track your progress

Because factors can change over time, including your number of employees, business income, health and other factors, it’s important to revisit your retirement savings plan periodically to figure out how successfully you are moving toward your goal. If you find that you’re falling behind, here are a few ways to increase your savings:

  • Review your budget.
    Are there areas where you can cut back in order to earmark more for retirement? This could include anything from switching phone plans to eating out less.
  • Add to your income.
    If you find that you’re not able to save more, it may be time to consider ways to make more. This could mean adding a new product or service to your offerings or taking on a side gig, such as driving for a rideshare program.
  • Consider reducing expenses.
    Are big mortgage or car payments making it too difficult to save? In some cases, downsizing to a smaller house, more affordable business space or less expensive car can be the key to freeing up some extra funds for retirement.
  • Evaluate the cost of debt.
    What credit or loan debt is impacting your investment goals? While it may feel good and seem best to eliminate debt as quickly as possible, it can be critical to compare ongoing cost from debt interest to what is known as opportunity cost from debt payments that could otherwise be invested. Comparing future debt payments to historical investment returns can help you decide how to best utilize your available funds.
  • Start an emergency fund.
    While experts suggest having three to six months of living expenses set aside, that can be a lofty goal to start with. However, ensuring that you have a small cushion of liquid funds available for unexpected expenses such as an insurance deductible or co-pay can help avoid using a credit or loans that increase the overall costs due to interest rates.

4. Create a succession plan

As the owner of your business, it’s important to have a plan for exiting the business if the need arises, whether it’s because you’ve reached retirement age or are facing a life circumstance you didn’t anticipate. Creating this plan involves careful thought and strategy. See Selling and Succession Planning for details on how to get started.

Although you may be overwhelmed by the day-to-day tasks of running your own business, taking the time to plan for your own retirement is an important step toward protecting your financial future — and that of your family. It can also be an excellent way to support your employees. Although offering retirement to your team isn’t required by law, it can be a wonderful investment in your business, allowing you to be competitive when hiring new employees while building loyalty with the ones you have.

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