You usually hear the phrase small business retirement alongside small business retirement plan. However, for smaller business owners small business retirement means you. Have you thought of your eventual retirement? Have you thought about what your options might be for the future?
Small business retirement in your business
You may have dreamed about selling your business and getting top dollar during the sale. You don’t have to look very far back to know that valuations for many businesses suddenly dropped overnight rather than being able to cash out and move on to the next phase many business owners found themselves just trying to keep their business afloat. But with markets, there is no certainty regarding time. However your health or disability may be a situation where you just can’t delay. You may also have a business that by its nature won’t be easily turned into cash and will have to rely on your own savings.
Small business retirement savings boosters
One of the ways to create a hedge against this possibility is to have your own small business retirement plan. While there are several choices I will focus on the 401(k) profit sharing plan opportunity. As the business owner, you have the opportunity to determine not only the type of plan but savings plan design in a 401(k) profit sharing plan. If you are a solo business owner, the path to saving $54,500 if over 50 years old is straightforward. If not, let me introduce you to the term plan savings design.
One type of plan design allows you to legally skew the profit sharing contributions to you. An attorney or what’s referred to as a third party administrator will offer a design based on your company employee demographics and job classes. The law was written with the understanding that highly compensated workers need to save more than the non-highly compensated workers. Further, it allows a skewing of the contributions towards those who are older as well. After all, you don’t have as much time to let the power of compounding work for you.
The combination makes for plan designs that shift the bulk of the profit sharing contributions to you. It’s important to work with a third-party administrator that will custom design this for you. Some bundled providers of retirement plans offer a standard, non-customized plan savings design.
Further, this presents potential opportunities for you to further manage your current taxes. You may be able to take a tax deduction for:
- Money that you are providing as an employee benefit a benefit to your employee
- Money that you are proving as an employee benefit to yourself
- Money you are deferring to your own account personally
All the while helping you defer up to $54,500 if over 50 years old.
Small business retirement savings accelerator
Another tool potentially at your disposal is a cash balance plan. If your business as relatively stable cash flows you may be able to take advantage of a cash balance plan. This type of plan can be added onto a 401(k) and profit sharing plan. At a recent seminar, Kathy Tompkins, an actuary with Shore Tompkins explained that if you’re over 60 years it allows you a potential deferral of $292,500. This is all tax deductible in the current year. The monies accumulate tax deferred. It’s considered a type of pension plan so it requires an actuary.
If you are a regular reader of my blog, you know that I am a proponent of starting with a financial plan on you and any partners of the business. If all you need is a cash balance plan it makes it a lot easier to get everyone on board. There are other options to look at if you all don’t have common needs. It’s important to work with someone who has specialized knowledge in retirement planning such as a CERTIFIED FINANCIAL PLANNER™ professional. In addition to passing a 2 day exam, a CFP® passed a module dedicated to retirement planning. They also take an ethical vow to keep your interests ahead of their own. The sooner you get started, the sooner the power of systematic contributions (dollar cost averaging) and compounding returns can go to work for you.
(1) This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
(2) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
(3) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
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