RELYING ON YOUR “RETIREMENT SAFETY NET” MAY BE RISKY

Relying on Your “Retirement Safety Net” May Be Risky

Yes, business owners can retire. But they need to consider all options. The reason many small-business owners don’t adequately prepare for retirement is that they often view the businesses as their retirement safety net. When they retire, they expect to transfer the firm to a family member or sell it and turn it into cash. In the meantime, they plow earnings back into the business to keep it growing.

According to financial professionals, this all-the-eggs-in-one-basket approach is a very risky retirement planning strategy. There are many options available to sole proprietors as well as small-business owners who want to offer savings plans to employees and themselves. These include:

  • A SEP-IRA – a tax-deductible retirement plan similar to a traditional IRA but targeted to solopreneurs.
  • A SIMPLE IRA – designed for small-business owners with fewer than 100 employees. Pretax contributions are deducted directly from employees’ paychecks.
  • A Solo 401(k) self-employed individuals with no employees can contribute a maximum of $53,000. A spouse who works in the business can contribute the same amount.
  • A SIMPLE 401(k) – another retirement vehicle for businesses with 100 or fewer employees. Account-holders can borrow against the money in a 401(k) and make withdrawals penalty-free in cases of financial hardship.

Funds invested in a diversified retirement plan trim the tax bill now and grow tax-deferred until withdrawals are made later. Usually, the cost of opening and administering a retirement savings plan is modest. Some 401(k) providers actively target small businesses and even offer access to retirement planning experts.