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How To Save For Retirement When You’re A Small Business Owner

    4 minute read

    As a small business owner, you’re responsible for every aspect of your business – including your retirement plan. Often, many companies think they are too small to offer a retirement plan for their employees or that they won’t be able to contribute much to their accounts. But no matter what size of your business, you shouldn’t miss out on the valuable benefits of starting a retirement plan. In this article, we’ll share some tips on why you should set up a retirement account and the difference between the top four plans.

    Why Contribute to a Retirement Plan?

    A retirement plan provides you with income for your post-retirement needs and helps you live a stress-free life. It should be a critical part of your financial planning early on. Without a retirement plan, you will most likely have to continue working past the “traditional” retirement age or, worse have no income. Here are a few reasons why you should consider contributing to a plan.

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    • Social Security benefits aren’t enough. The average monthly benefit paid by the Social Security Administration in 2022 was $1,550 per month, which isn’t nearly enough for a comfortable retirement.
    • You won’t have to worry about being a burden to your loved ones. A comprehensive retirement plan can include savings for long-term medical costs. When you know your expenses are taken care of, you won’t have to rely on your family to fill the gap.
    • Enjoy tax savings and advantages. No one likes paying more taxes than necessary. Luckily, retirement plans have significant tax advantages. For example, in a traditional 401(k) plan, contributions are taken directly from your paycheck before federal income taxes are withheld. This lowers your total taxable income and may even put you in a lower tax bracket.
    • The power of compound interest. The biggest advantage of investing in a retirement plan is compound interest. The earlier you start investing, the more time your money has to grow since you can gain cumulative earnings over your previous earnings.

    4 Types of Retirement Plans for Small Business Owners

    Self-employed or sole proprietors can choose between four main retirement options. The right plan for your business will depend on your company’s structure, size, and how much money you can afford to contribute. As with all major financial decisions, consult your accountant and/or tax advisor to help select the right plan for you and your business.

    Plan TypeDescription
    (Simplified Employee Pension IRA)
    Under a SEP-IRA, you, as an employer, contribute an equal percentage of your salary directly to a traditional IRA. SEP-IRAs are usually easier to maintain since there is limited paperwork, and you are not required to file financial reports annually to the IRS. However, note that if you have employees, they are unable to contribute to this plan.
    Best for: Self-employed people or small-business owners with no or few employees.
    Contribution limits: No more than 25% of the employee’s compensation or $66,000 in 2023
    (Savings Incentive Match Plan for Employees)
    A SIMPLE IRA plan is the only IRA plan that allows you and your employees to contribute towards retirement. However, your business must have no more than 100 employees and not also maintain another type of retirement plan. In this plan, you can match the contributions of participating employees or contribute a fixed percentage of each employee’s pay. Usually, a bank or financial institution will handle most of the paperwork and filing for your company.
    Best for: Larger businesses with up to 100 employees.
    Contribution limits: Employees can contribute up to $15,500 with a catch-up amount of up to $3,500 for those aged 50 or over in 2023. Employers are generally required to match dollar-for-dollar basis up to 3% of the employee’s compensation.
    Traditional or Roth IRAThe easiest way for a self-employed person to start saving for retirement is with a traditional or Roth IRA. There are no special filing requirements and you can use it whether or not you have employees. The difference between the traditional and Roth IRA is how and when your money is taxed. In a traditional IRA, you contribute pre-tax dollars and in Roth IRA, you contribute money that’s already been taxed.
    Best for: Anyone looking to start contributing to retirement, especially if you’re leaving a job to create a new business.
    Contribution limits: The total contributions you make each year to your traditional IRAs and Roth IRAs can’t be more than $6,500 ($7,500 if you’re age 50 or older) in 2023.
    Solo 401(k)A Solo 401(k) is perfect for self-employed people with no other employees. When you contribute to a Solo 401(k), you can add funds as an employee and employer, which greatly increases your contribution. The maximum contribution amount for 2023 is $61,000, and if you’re 50 or older, you can contribute an additional $6,500, bringing the maximum to $67,500.
    Best for: Self-employed with no employees
    Contribution limits: As an employer, you can contribute up to 100% of your income up to the annual contribution limit ($22,500 in 2023 or $30,000 if age 50 or over)

    Make Business Insurance Part of Your Financial Plan

    No matter which retirement plan you choose, a key component of retirement planning is protecting your assets. You’ve worked hard to build your business and protect it by having the right Business Insurance coverage. A lawsuit against you or your company could end up putting you, your business, and your retirement accounts at risk. Speak with one of our Commercial Insurance Specialists today at (855) 919-4247 for a quick and easy free quote.

    The information in this article is obtained from various sources and offered for educational purposes only. Furthermore, it should not replace the advice of a qualified professional. The definitions, terms, and coverage in a given policy may differ from those suggested here. No warranty or appropriateness for a specific purpose is expressed or implied.