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When
building a successful business, don't forget to build a healthy nest egg.
These easy ways to save for retirement will get you started.
With
the many demands placed on business owners, these individuals usually aren't
focused on their retirement. Many small-business owners often trade
tomorrow's retirement planning for today's successful company. Owners do
imagine their comfortable retirement, but often forego saving for retirement
in order to keep their businesses thriving in the moment.
Here's
where the fatal flaw lies in the retirement plans of many small-business
owners: After pouring countless hours into building the business, their
strategy usually entails either having enough incoming revenue by they time
they retire to offset any savings, or hope that they can sell their business
for an amount significant enough to fund their golden years. Often times
many business owners are so sure this will happen that they don't bother to
make any contributions to the variety of retirement and investment accounts
out there. In a sense, they're putting all of their eggs in one basket, and
more often than not, they can't afford to retire when the time comes.
The
good news is, when you're self-employed you have more choices about when to
retire and how to save for retirement. With a little planning and consistent
contribution to the right accounts, you can still put away a substantial
nest egg. Here's how you can begin.
1.
Analyze your business and retirement strategy. The first step in setting
up a retirement-saving strategy is to analyze your business. Does the
business have sufficient cash flow to put the extra money aside for
retirement? If it does, start immediate contributions to the variety of
options, many of which are listed below. If it doesn't, you're most likely
going to have to wait.
2.
Fit your company's needs. When choosing a retirement plan, you must also
examine the following things:
-
the
best investment option for you
-
your
business and employees (if applicable)
-
the
maximum amount of possible yearly investment
-
set-up
difficulty
-
administrative
complexity and administration costs
-
tax
ramifications
The
tax ramifications are extremely important to examine, because with the right
retirement plans, you can reduce and streamline your tax obligations. For
example, putting savings in a SEP IRA can reduce the taxes you pay today,
but a Roth IRA lets you pay taxes upfront so that you can withdraw funds
tax-free upon your retirement. The bottom line is to consider retirement
funds not just for what it can do for your retirement, but how it fits
within your business plan and to help your current tax situation.
3.
No employees? Consider the new self-employed 401(k) plan. Flexibility is
the main highlight of the new self-employed 401(k) plan or the solo 401(k)
plan. This plan was created in 2001 tax legislation and is geared toward
self-employed individuals who have no employees or who work with their
spouse. The plan allows the worker to contribute a percentage of income and
adds an amount parallel to the voluntary contribution that workers who are
employed can put into conventional 401(k) plans. The mechanics of setting up
a solo 401(k) plan are also a lot less cumbersome than other small-business
plans, and the administrative costs are relatively low. The largest
disadvantage of the plan is that the limit for the total of the
contributions can't exceed $44,000.
4.
Have employees? Consider the Simplified Employer Pension plan (SEP). SEP
plans are an easy and low-cost retirement plan that can provide a
significant source of income at retirement by allowing employers to set
aside money in retirement accounts for themselves and their employees. Under
a SEP, an employer contributes directly to traditional individual retirement
accounts for all employees and to themselves.
With
a SEP, there are minimum administrative burdens, including few paperwork
requirements, and little or no startup costs. Therefore, not only are SEP
plans inexpensive to establish, but also inexpensive to maintain. These
plans also have a higher contribution limit when compared to the traditional
IRA. The good thing is, there are no minimums in terms of your contribution
amount. Employer and employee contributions aren't mandatory every year, so
you can vary your contributions each year based on the amount of extra money
available to save, and there are many tax advantages to the plan.
Another
benefit of the SEP plan are the tax advantages. Contributions are
tax-deductible, and your business pays no taxes on the earnings on the
investments. Also, the small-business owner may be eligible for a tax credit
of up to $500 per year, or each of the first three years for the cost of
starting the plan.
5.
Lead by example: Inspire your employees to contribute to retirement with a
SIMPLE 401(k) plan. The SIMPLE 401(k) plan was established in 1997 so
that small businesses could have an effective, cost-efficient way to offer
retirement planning to their employees. This plan is a cross between the
SIMPLE IRA and the traditional 401(k) plan, and is available to
organizations with fewer than 100 employees. Employees who are 21 years or
older, and have been employed for at least a year, can be eligible to
participate in this plan.
Employers
have two options for contribution to this plan. The first contribution
method encourages employee participation by requiring the employer to match
all employee contributions up to 3 percent of their salaries, with a $6,000
limit. The second option is a fixed contribution plan. In this case,
employers pay a flat 2 percent of the worker's salary. This contribution is
required for all participating employees, regardless of whether the
employees contribute on their own.
The
advantages of the SIMPLE plan is that it's less expensive compared to the
traditional plan and has lower maximum employee contribution limits. The
advantage to the employee is that there are mandatory employer
contributions, and employer contributes made to the plan are automatically
full vested.
6.
Consider the larger picture. Investments are just one tool of the
financial planning process. It's important to make sure other preparations
are made, such as will planning, long-term care medical insurance and
establishing life insurance to increase the likelihood of a comfortable
retirement. You also must carefully analyze your time horizon and risk
tolerance, and invest retirement contributions appropriately and
consistently. A complete analysis of one's objectives, expected time until
retirement, and tolerance for the ups and downs of the market is a crucial
part of the planning process. Seek advice.
Make
sure to enlist the help of an accountant and financial advisor. There are
plenty of resources on the internet, and numerous books dedicated to the
subject matter, but a financial advisor will be able to analyze your
particular situation and guide you in the right direction.
J.
Graydon Coghlan is president of San Diego-based Coghlan
Financial Group, LLC, a financial advisor firm that specializes in
financial, retirement and estate planning.
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