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How to navigate retirement as a small business owner

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“When you own a small business, almost every part of your business is intertwined with your personal life. You are your business and your business is you,” said David Burton, a tax advisor at Harness Wealth.

Establishing a retirement plan and earning money early can provide you with a solid financial cushion to make a withdrawal decision.

1. Assess your retirement needs

It is important to understand how much you will need for a comfortable retirement life.

Consider factors such as your preferred retirement age, projected cost of living and other important items, including taxes, inflation and social security benefits.
How much should I save for retirement?

Be sure to calculate potential scenarios, for example if you decide to sell a business or if you no longer generate business income.

By using financial tools such as pension calculator it can help you assess your needs. You can also consult a financial expert which specializes in retirement planning.
Either way, get the feeling early how much money will you need it can help you decide on the best retirement strategy to meet your financial goals.

2. Create an exit strategy

You will need to figure out what to do with your job when you retire. This includes having an exit strategy.

This could mean transferring ownership of the business to someone else, selling the business, or maintaining the first public offering. When deciding on an exit strategy, ask yourself how long you want to be a part of your business, how best to protect your business investments, and what your financial opportunities and goals are.

“Many business owners don’t always think about what their exit plan or retirement plan is for their business. It’s never too early to plan for it,” said Kristen Carlisle, CEO of Betterment 401 (k).

In many cases, an exit strategy should be part of your initial business plan and steps.

3. Determine which retirement savings plan is right for you

Once you gain a feel for your retirement needs and have an exit strategy for your business, it’s time to determine which retirement savings plan is right for you.

Consider the limits on plan contributions, the number of employees you have, and the tax breaks that come with the type of account you choose.

“No matter where you are on the path of business planning, it’s important to think about how to create a retirement plan yourself. If you have employees, it’s also a really good idea to offer them a pension so they can feel financially supported and prepared,” Carlisle said.

Here are the five most common types of self-employed retirement plans:

Traditional or Roth IRA

  • A traditional or Roth IRA is a retirement savings account that comes with tax breaks. With a traditional IRA, you pay tax on your money only after retiring. Because taxes are deferred, your return on investment can grow faster. Traditional IRAs can be deductible or non-deductible. A deductible IRA allows you to deduct contributions to your tax return, while a non-deductible IRA cannot. With the Roth IRA, you pay tax on the money you pay in advance, allowing you to grow tax-free money, and you don’t pay tax at the time of retirement. You or your employees can establish and contribute to your own IRAs. The old 401 (k) from a previous job can also be transferred to the IRA.

SEP (simplified employee pension)

  • The SEP IRA is a type of tax deductible for the self-employed or small business owners – this may also include anyone with a part-time income. SEPs function like traditional IRAs in that contributions are not taxed until they are withdrawn. This type of account can be opened by an employer or a self-employed person and allows the employer to pay contributions to the accounts of its employees. They offer a higher contribution limit that can be given in addition to traditional or Roth IRA contributions.

SIMPLE IRA (Employee Savings Matching Plan)

  • SIMPLE IRA is another type of tax-deductible account for self-employed persons or small business owners. Unike SEP IRA, employees can make contributions, not just the employer. SIMPLE IRAs also require the employer to make either a dollar for a dollar up to 3% of the employee’s salary or a lump sum of 2% payments, whether the employee contributes or not.

Individual or individual 401 (k)

  • Solo 401 (k) is an individual 401 (k) for a self-employed individual or a small business owner without employees. The Solo 401 (k) works the same as the traditional 401 (k) offered by larger companies and employers. They come in traditional and roth varieties, just like the IRA. Contributions can be divided between the two.

Defined benefit

  • A defined benefit plan is a type of employer-sponsored pension account, such as a pension. The employer decides on a certain payment upon retirement based on factors such as salary and length of service in the company. When you withdraw, you can opt for a lump sum or a monthly “annuity” payment.

4. Make retirement planning a priority

Sometimes it can be easy to get caught up in the day-to-day operations of keeping a small business afloat. But no matter what, don’t make the mistake of neglecting retirement benefits for you or your employees, Carlisle said.

“Be sure to think about your future, the future of your employees, no matter the size of your organization,” she said. “You don’t have to start big, you can start small and grow from there, just provided you don’t ignore the benefit.”

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