Managing your business

Simple Four Step Small Business Retirement Plan

By: Kate Samano October 18, 2021

According to the Small Business Association, Americans aren’t saving enough for retirement. This applies to employees and employers, although it’s low-income individuals and small business owners with fewer than 10 employees demonstrating the most cause for concern. Small business retirement planning, contribution and participation rates are low, especially considering the number of benefits available to entice them in.

Developing a business owner retirement plan is a good idea for anyone, regardless of your age or how established your business is. Having a strategy in place as early as possible gives you the best chance of maximizing ROI on what’s likely your biggest investment and asset. Keep reading to learn more about the best retirement plans for small business owners, and discover how to devise a thorough retirement strategy that’s advantageous for you and your employees.

The Importance of Small Business Retirement Plans

Many people underestimate how much they need to save for retirement, and it’s understandably difficult to consider that you’ll one day stop working. However, retirement can last for upwards of 30 years. It’s a considerable portion of your life, and you should prepare to make the most of it.

As a small business owner, there’s a good chance you’re used to working hard and place a high value on your contribution to society as an entrepreneur. Nonetheless, you deserve a rest once you reach retirement age and should strive to make it the most enjoyable and rewarding time of your life. Most people require 80% of their current income to live comfortably in retirement, yet the average monthly paycheck from the Social Security Administration is $1,200. As you can see, there’s a disconnect between what’s needed and actual outcomes.  

If you plan on selling your company, you’ll need to prepare for years in advance for a smooth and successful transition. Unfortunately, this is where too many small business owners miss the mark. Luckily, Lendzi has some top tips to help you choose the best small business retirement plans, including how to approach selling your company for maximum ROI.   

Business and Employee Benefits

Before diving into how to choose business owner retirement plans, let’s take a look at the benefits to you, your company and your employees:

  • Employer contributions to employee retirement plans are tax-deductible.
  • Contributions employees make can reduce their taxable income.
  • All assets tied up in a retirement plan from the IRS grow without being taxed.
  • Employee contributions and investment gains are only taxed when they’re distributed.
  • Employers have lots of choices when it comes to retirement strategies.
  • Payroll deductions take the burden of saving away from the individual, making it easier.
  • Interest accrues as the fund grows.
  • Employers can get tax credits for starting a retirement fund.
  • Strong retirement plans attract high-quality employees.

Employees and the employer benefit from enhanced security in retirement.

How to Choose the Best Retirement Plans for Small Business

Retirement is easy as an employee, but as a business owner, you’ve got a little more work to do. While you might have thought you’d be working forever, with careful planning, you can enjoy a long and fulfilling retirement.  

You can choose between three types of retirement plans for small business owners — Individual Retirement Arrangements, defined benefits plans and defined contribution plans (the various 401(k) schemes). Defined contribution plans tend to provide bigger and better benefits for employees than IRAs, while IRAs are easiest to set up and maintain. Defined benefit plans follow the structure of a traditional pension, letting the business owner contribute and deduct more each year than possible under a defined contribution plan. However, they can be challenging to set up and maintain. 

It’s crucial that you conduct thorough research and don’t rush the decision, as the implications can be significant. We’d recommend speaking to financial experts before making a decision, but you can find more in-depth information about the various small business retirement plans further down in this article.   

Is Selling Your Business a Viable Retirement Plan?

Lots of business owners who procrastinate when it comes to setting up a business owner retirement plan do so because they’re relying on selling their business when the time comes. With that in mind, let’s take a look at some statistics about small business sales, mergers and acquisitions and transfers to second- and third-generation family members:

The final statistic goes a long way to explaining the first two. There’s a huge difference between a business that’s prepared for a takeover and one that isn’t. Your company processes and procedures might have your operation running like clockwork, but without thorough documentation and strategy planning, it won’t translate to the new owner. These are the three main reasons many companies aren’t ready when they sell without a carefully devised plan:

  1. The company is too dependent on the owner for business operations and client and supplier relationships.
  2. The company has an overly concentrated client base.
  3. There’s no succession plan or qualified management team ready to oversee the transition period.

Implement a Business Value Enhancement and Transition Plan

If you can relate to the above as a hands-on business owner and hard worker, don’t fret. While planning to hand over the reins might feel strange at first, it’s 100% necessary for a successful sale. Here are a few tips to help you get your company into a position where it’s ready to sell:

  • Use key performance indicators to track performance and help you devise a value enhancement plan.
  • Build a business succession plan.
  • Thoroughly research your sales options — employee stock ownership plans, family purchase, purchase by company management, financial buyer and strategic third-party acquisition.  

Even if you have a succession plan in place and feel confident about selling your business at retirement, you should implement a small business retirement plan. The benefits are too much to forego, and implementing a strategy is easier than you might think.

Let’s take a look at the four crucial steps to take when choosing and implementing retirement plans for small business owners.

Step One: Calculate How Much You Need to Save

It’s important that you make planning for retirement a priority because it accounts for such a large portion of your life. When it comes to deciding how much you need to save, be realistic. If you enjoy a particular type of lifestyle, don’t shy away from planning to continue it into retirement. Most experts suggest that 80% of current earnings is a good benchmark to aim for, but this might be different for you if you’re particularly lavish or frugal. 

The annual limit that business owners can contribute to their retirement fund is whichever is highest between 25% of your earnings and $58,000 per year in 2021. To get the best out of your golden years, aim to save this maximum amount.

Step Two: Pick a Business Owner Retirement Plan

Choosing the best plan for you, your business and your employees is the tricky part, and managing it can be time-consuming, but this shouldn’t put you off. Tax breaks and benefits to workers are well worth the investment of resources. Working with a team of financial experts can reduce the burden on you and leave you free to run your business and plan for the future. 

Here’s a handy guide to help you understand the best small business owner retirement plans. 

Payroll Deduction IRA

A payroll deduction IRA is a simple way to help employees save for retirement. In this case, the employee chooses how much they contribute and how often, and automatic deductions help them plan ahead. Payroll deduction IRA contributions are tax-deductible.  

SIMPLE IRA

A SIMPLE IRA is an option for employers with fewer than 100 employees. A percentage of each paycheck is put forward by the employee. Employers must either make a fixed contribution of 2% to every employee, including those who don’t contribute, or they need to match contributions dollar for dollar, up to 3% of their total salary.  

Simplified Employee Pension

A SEP lets you set up a SEP IRA for yourself and each of your employees. You’re expected to contribute a set percentage of pay for every employee, but you’re not obligated to make payments every year. SEPs don’t have the same start-up and running costs as traditional pensions. They permit a contribution of up to 25% of each employee’s pay, and only the employer contributes. 

Defined Benefit Plan

Defined benefit plans are the traditional type of pension. While they usually harbor the most gains for the employee and employer, they’re generally the most challenging and time-consuming to set up. As the name suggests, you and your employees benefit from knowing the fixed sum you’ll get annually in retirement.

It’s possible to operate a defined benefit plan in conjunction with other small business retirement plans. Making your investment portfolio as diverse as possible is strongly recommended for individuals looking for maximum ROI.  

401(k)

Lots of people consider 401(k) plans to be the best retirement plans for small businesses. This profit-sharing plan lets your employees defer a chunk of their salary by investing in your company’s 401(k) plan. The federal government and the majority of state governments don’t tax pretax deferrals and employer contributions, making this option beneficial for you and your employees. Under a  401(k) (Roth) plan, employees have the option to make contributions after-tax.  

Safe Harbor 401(k)

A Safe Harbor 401(k) plan eradicates some of the tests necessary for a traditional 401(k) plan in view of encouraging employees to get involved. It’s particularly advantageous for high-earning employees who would have their contributions limited by a traditional 401(k) plan.  

Automatic Enrollment 401(k)

Automatic enrollment goes one step further in encouraging uptake among employees, which makes it more likely that the plan passes the standard 401(k) tests. If your priority is a high level of participation, this might be the best retirement plan for your small business. Employees can opt-out, but otherwise, deductions are made automatically, with default contribution rates in place. 

You can find out more about the different types of individual and small business retirement plans from the IRS.

Step Three: Reap Tax Benefits

Once you’ve got a business owner retirement plan in place, you can start reaping the benefits in the form of tax relief and potential tax credits. Eligible small business operators can claim up to $500 using Form 8881 to cover startup administration costs incurred in setting up a company retirement plan and training employees on the scheme. Employers can claim this credit for the first three years the plan is in place. 

Per section 404 of the Internal Revenue Code, employer contributions are tax-deductible on your federal income tax return.

Step Four: Consult Investment Experts About Retirement Plans for Small Business Owners

Setting up a small business retirement plan is essential for many reasons. It can help you save money on taxes, makes you a more attractive prospect as an employer and sets you up for your own retirement. That said, even though you understand the various types of business owner retirement plans, it doesn’t mean you have the time to implement and manage a pension scheme while making the necessary operational adjustments for retirement.
Let the financial experts at Lendzi take care of your company’s retirement planning, so you can get on with making your business profitable as possible. Your time and expertise are better spent implementing a succession plan for a smooth transition when the time comes to retire. Call us today at (877) 453-6394 to find out more.

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