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.