Being a business owner can be more demanding than a regular job. Likely the biggest challenge business owners often face is creating a plan to transform their business into long-lasting personal wealth. Many small business owners invest personal savings into their business, and a third of business owners don’t have a retirement savings plan. This can create a troubling situation as retirement approaches and they don’t have enough of a safety net to fall back on. Let’s take a look at these four steps that will help you catch up for retirement in a hurry.
Unfortunately, you don’t have an employer-sponsored 401(k) account with matching contributions at your fingertips (often considered the retirement savings default option). That doesn’t mean you are out of luck when it comes to building a nest egg. Here are some savings options to consider.
A traditional IRA is similar to a 401(k) in that you can contribute pre-tax dollars to an investment account that grows tax-deferred. For 2022 you can contribute up to $6,000 or $7,000 if you’re over age 50.
With a Roth IRA, your contributions are not tax-deductible like traditional IRAs. However, your earnings grow tax-deferred and your withdrawals are tax-exempt (subject to IRS guidelines). Like a traditional IRA, you can contribute up to $6,000, or if you’re over age 50, a total of $7,000. However, one caveat to the Roth is that there are income restrictions. If your income surpasses the cutoff amount for a Roth IRA, you can still potentially contribute to one through a backdoor Roth transaction.
A SEP IRA, also known as a Simplified Employee Pension, is an IRA similar to a traditional IRA. As an employer of yourself, you can make contributions on your own behalf for your retirement. You can set up a SEP IRA in addition to a solo 401(k) and can contribute 25% of your self-employed income or $61,000 per year (whichever is greater).
A solo 401(k) is similar to a traditional 401(k) you’d contribute to as an employee. Funds invested within a solo 401(k) plan grow on a tax-deferred basis. The powerful feature of this plan is that you can contribute in two separate capacities, as an employee and as an employer. Wearing your employee hat, you can defer up to $20,500 (or $27,000 if age 50 or older). As the employer, you can also contribute up to 25% of compensation as defined by the plan. Combined, you can contribute up to $67,500 (if you’re over the age of 50).
Defined benefit plans have much higher tax-advantaged contribution limits and can be designed to fit the needs of almost any business. Depending on your age and income, a defined benefit plan allows you to set aside up to hundreds of thousands of dollars to fund your retirement, making it possible to save a lot, even if you have little time.
The less debt you have when you enter retirement, the better. Whether it’s personal debt in the form of credit cards, car loans, or a mortgage, or business debt in the form of bank loans or equipment purchases, reducing your debt before retiring will lower your monthly expenses and enable your savings to grow and last longer. Review all current debts you face comparing interest rates and balances. This can help you decide which to pay off and when.
Do you have an exit plan? Even if you are just in the beginning stages of your business, it’s imperative to have a plan for the future of your company because it will likely become one of your largest assets. Around 78% of small business owners plan to sell their businesses to fund their retirement, with the sale profits funding 60-100% of their retirement needs. If you are heavily relying on the sale or succession of your business to take care of your future financial needs, it’s critical that you start thinking about how and when you may want to leave your business and what you can do now to prepare so you receive the highest price possible. Having a strategic transition plan will make your company more appealing to buyers who want assurance that it will continue to thrive without you. Even if you’re passing the business on to family members, you need a plan in place to ensure that it continues to prosper and all family members are treated equally.
It’s no secret that being a business owner complicates life and finances. On top of saving for retirement and taking care of your family, you also have employees to think about and tax considerations. You are in a unique situation and would benefit from working with someone who specializes in serving business owners.
At Coign Capital Advisors, we specialize in serving small business owners and providing unique services to take care of all their financial needs. To learn more about how we can help you catch up for retirement in a hurry, set up an appointment today by sending us an email at firstname.lastname@example.org or calling 801-676-4582.
About Coign Capital Advisors
Coign Capital Advisors is a fee-based investment advisory firm based in Draper, Utah. Specializing in serving retirees, business owners, and entrepreneurs, the firm provides holistic wealth management that goes far beyond investment consulting and strives to attain suitable performance combined with solutions that make clients’ financial goals achievable. Led by J. Matthew Zundel, ChFC®, Robert P. Welch, Adam G. Lefler, R. Zeb Lowe, CFP®, Daniel R. Zundel and Courtland Adams clients receive a high level of service from a team with more than 90 years of combined experience. To learn more, visit www.coigncapital.com.
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