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Retirement Plans for Business Owners

Starting a retirement savings plan can be easier than most business owners think. What’s more, there are a number of retirement programs that provide tax advantages to both employers and employees.

Any Tax Advantages?

A retirement plan has significant tax advantages:

  • Employer contributions are deductible from the employer’s income,


  • Employee contributions (other than Roth contributions) are not taxed until distributed to the employee, and money in the plan grows tax-free.
Why Save?

Why Save?

Experts estimate that Americans will need 70 to 90 percent of their preretirement income to maintain their current standard of living when they stop working. So now is the time to look into retirement plan programs. As an employer, you have an important role in helping America’s workers save.1

By starting a retirement savings plan, you will help your employees save for the future. Retirement plans may also help you attract and retain qualified employees, and they offer tax savings to your business. You will help secure your own retirement as well. You can establish a plan even if you are self-employed.

Any Other Incentives?

Any Other Incentives?

In addition to helping your business, your employees, and yourself, it’s easy to establish a retirement plan, and there are additional reasons for doing so:

  • High contribution limits so you and your employees can set aside large amounts for retirement;
  • “Catch-up” rules that allow employees age 50 and over to set aside additional contributions. The “catch up” amount varies, depending on the type of plan;
  • A tax credit for small employers that enables them to claim a credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or certain other types of retirement plans (more on these later). The credit equals 50 percent of the cost to set up and administer the plan, up to a maximum of $500 per year for each of the first 3 years of the plan;
  • A tax credit for certain low- and moderate-income individuals (including self-employed) who make  contributions to their plans (“Saver’s Credit”). The amount of the credit is based on the contributions participants make and their credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate can be as low as 10 percent or as high as 50 percent, depending on the participant’s adjusted gross income;
  • A Roth program that can be added to a 401(k) plan to allow participants to make after-tax contributions into separate accounts, providing an additional way to save for retirement. Distributions upon death or disability or after age 59 1/2 from Roth accounts held for 5 years, including earnings, are generally tax-free.
A Few Retirement Facts

A Few Retirement Facts

Most private-sector retirement vehicles are either Individual Retirement Arrangements (IRAs), defined contribution plans, or defined benefit plans.

  • People tend to think of an IRA as something that individuals establish on their own, but an employer can help its employees set up and fund their IRAs. With an IRA, the amount that an individual receives at retirement depends on the funding of the IRA and the earnings (or losses) on those funds.

  • Defined contribution plans are employer-established plans that do not promise a specific amount of benefit at retirement. Instead, employees or their employer (or both) contribute to employees’ individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). At retirement, an employee receives the accumulated contributions plus earnings (or minus losses) on the invested contributions. Defined benefit plans, on the other hand, promise a specified benefit at retirement; for example, $1,000 a month. The amount of the benefit is often based on a set percentage of pay multiplied by the number of years the employee worked for the employer offering the plan. Employer contributions must be sufficient to fund promised benefits.

  • Small businesses may choose to offer IRAs, defined contribution plans, or defined benefit plans. Many financial institutions and retirement plan practitioners make available one or more of these retirement plans that have been pre-approved by the IRS.

Business Owners Staying Successful

Building a successful business takes a great deal of resources. With your time and energy focused on the daily demands of running your business, you may not be aware of important financial planning issues that should be addressed to help ensure long-term business success.

As a business owner, it’s important to make time for financial planning. Putting strong plans in place now can help protect your business from the consequences of unforeseen events that are often out of your control. If these events occur without a financial plan, it could be too late to shield your business from the impact.

Consider the following key financial planning questions to see how your business would fare if the unexpected happens. Your financial advisor should help you focus on their future goals while safeguarding your business from unforeseen events. A financial professional working with your current advisors can provide advice and expertise, while recommending solid strategies to help protect your business from costly mistakes.

Don’t let your business change in an instant.

Will your business survive if the unexpected happens?

Business succession planning helps ensure that your business can continue if unexpected incidents like the loss of a partner, divorce, death or disability occur. Any of these events can quickly ruin your future business plans. And, planning for an unexpected accident or illness becomes even more critical when you consider that:

  • Just over 1 in 4 of today’s 20 year-olds will become disabled before reaching age 67.2
  • About one in nine of today’s 20-year-olds will die before reaching age 67.2
  • 67% of the private sector workforce has no long-term disability insurance.2

Succession planning is especially important if you plan to pass on your family business and help ensure that you’re not one of the 70% of family businesses that don’t survive to a second generation. Or one of the only 10% that make it a third generation.3 Make sure everything you have worked so hard to build stays intact to pass onto the next generation.

Succession Planning

Review these questions with your Financial Adviser to Determine Your Succession Risk

  • Do you have a formal succession plan for continuing your business?
  • Have you selected a successor to take over your business?
  • Does your successor, family and key employees all know about your future plans or succession
    plan for the business?
  • Do you have a buy-sell agreement in place?
  • Have you funded your buy-sell agreement?
  • Have you reviewed your buy-sell agreement and funding arrangement in the last 2 years?
  • Can you or your heirs, business partners and attorneys easily locate the succession plan, buy-sell
    agreement and funding documents?
  • Have you completed an independent business valuation?
  • Has it been more than 2 years since your business was valued?


Is Your Business your retirement plan?

When you meet with your financial professional plan to review the following questions to help determine if your business is at risk.

  • Do you know when you want to retire?
  • Have you estimated your annual expenses or how much income you will need in retirement?
  • Do you plan to sell your business to fund your retirement?
  • Have you determined what your Social Security benefit will be when you retire?
  • Do you have other savings or investments outside of the business that will help pay for your retirement?
  • Do any of your retirement assets have guaranteed returns?
  • Do you think your savings will be sufficient to cover your estimated expenses in retirement?
  • In the last 2 years, have you looked at your retirement plan to identify any shortfalls?

The Reality for Many Business Owners

If you’re like most business owners, you tend to put all your money back into the business. In fact, 45% of a small business owners’ net worth is tied up in their business. But relying on your business to be your sole source of retirement income is like putting all your eggs in one basket. If you plan to sell your business to fund retirement, consider that only 3% of start-up entrepreneurs plan to acquire an existing business. This means only a few people may even be in the market to consider buying your business. And, you can’t pass your business onto your children if you need to draw income from it. So it’s especially important to have a retirement plan in place that is not solely dependent on your business.

1 mbda.gov November 2015

Social Security Administration. January 2019

3 Harvard Business Review. February 2012

Succession Planning:

Many people think of succession when getting ready to retire. But, there are several scenarios where it may not be their choice, such as when disability, divorce, or death of a business partner occurs. What then?

Retirement Planning:

If your business factors into your retirement plan, you need to consider the unique challenges that a business brings to retirement – like ensuring you have a reliable income stream and if necessary, a buyer for your company.

Estate Planning:

Push aside those images of butlers and private jets; estate planning is not just for the super wealthy. It’s imperative for business owners who tend to have most of their net worth tied to the business. Not having a plan can dramatically impact the future of your family and business.

Key Employee Planning:

It’s important to recognize and reward vital staff members who help you keep the business running smoothly, allowing you more freedom to focus on business growth. Taking the right steps now could help keep you from losing a critical employee to a competitor in the future.

Question about how to grow and support your business? Please let us know

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