[ad_1]
Retirement can seem like a dark cloud for small business owners. Many invest blood, sweat and tears – and every penny – to build their business but don’t set aside money for the future.
The vast majority of entrepreneurs report that they have not set aside any retirement savings. For some, selling the business is their only retirement plan.
That’s a risky bet, says Keith Hall, president and CEO of the National Association of the Self-Employed.
“You’re putting all your eggs in one basket. It’s not just your current lifestyle, it’s your future,” says Hal. If something goes wrong, you sacrifice both.
And the list of things that could go wrong is long: Your business could fail. Your health may fail. You may not find a buyer. You may have to sell for less than you want. You may not be able to fully retire.
Instead of playing when everything is going right, multiply your nest egg to last you into your later years.
Make retirement planning a priority
Saving for retirement is often the last item in your budget and the first to cut other priorities, says Hall. Instead, make it as important as paying off your mortgage or running your business.
This doesn’t come naturally to most entrepreneurs, who often focus on immediate needs and tend to plan in three- to five-year increments.
“As an entrepreneur and small business owner, it’s hard to think beyond 20 years,” says Mary Bell Carlson, owner of Carlson Consulting LLC. “I’m usually wondering what to do today for quick cash and long-term profitability.”
But Carlson, a financial advisor and certified financial planner, makes a point to invest where she is. She and her husband contribute to a retirement plan provided by their employer. Each of them keeps money in different investments in individual retirement accounts.
“My biggest lesson is to start, no matter how small. Just starting is important,” she says.
Decide what you can afford, whether it’s 1%, 5% or 10% of your gross income, and commit to that, says Hall. Over a long enough window, even small regular contributions will compound into something meaningful.
There are several retirement plans for small business owners, each with requirements, provisions and tax implications.
- Traditional, ROTH IRA: Individual retirement accounts are easy to open and available to anyone. You can contribute up to $6,000 in 2022 (up to $7,000 if you’re 50 or older). The main difference between traditional and Roth IRAs is whether you want to seek tax savings now or later. Traditional IRAs use pre-tax earnings, but you pay taxes when the money is withdrawn. With Roths, it’s the other way around.
- 401(k) only Available to business owners without full-time employees (except for spouses). The contribution limit for 2022 is up to $61,000, although that is split into two parts, each with a limit. Similar to an employer-sponsored 401(k), contributions are pre-tax and withdrawals are taxed as income.
- SEP IRA A Simplified Employee Retirement IRA, or SEP IRA, works just like a traditional IRA. Annual contributions are capped at $61,000 in 2022 and $6,000 for a regular IRA. Another key difference: If you put money into your own SEP IRA, you must contribute an equal percentage to employees. This option is best for solopreneurs or those with few employees.
- SIMPLE IRA: This option has a lower contribution limit of $14,000 (for those under 50) in 2022, but offers employee accounts and is easier for small companies to administer than a traditional 401(k). You must give all employees a 3% match or a blanket 2% contribution. You can deduct contributions made to your account and on behalf of your employees.
Get input from a professional
Of course, you can try to figure out which retirement plan is best for your business. Or you can work with a certified financial planner or registered investment advisor to determine the best path. Doing the latter can give you confidence in your strategy, avoid any costly penalties and make sure you don’t leave any money on the table.
If selling is still part of your retirement plan, professional help is important, says Norm Sherman, a certified consultant with SCORE, a national volunteer organization that provides free business consulting. First, you need to know exactly whether your business is marketable and what to expect in the sale.
An investment banker or business broker can evaluate your revenue, profit margins, business structure, and market to provide you with an honest appraisal and help you better position your business for future sales.
“It doesn’t cost you anything to get the answers to these questions,” says Sherman. “Don’t act blindly; find professionals who can help you.
— Kelsey Sheehy, NerdWallet
The content is for educational and informational purposes and does not constitute investment advice. Kelsey Sheehy is a writer at NerdWallet. Email: ksheehy@nerdwallet.com. Twitter: @kelseylsheehy.
[ad_2]
Source link
