Retirement Options

20150716210028-retirement-savings-money-in-jar

As the April 15 personal tax deadline looms, you’re likely overwhelmed with short-term concerns about your business budget and your personal finances. You should also be considering two crucial longer-term questions: What are you saving for retirement, and where are you saving it?

If your answers boil down to “hoping to sell my business when I’m ready to retire,” please think again. This is a particularly good time to weigh your options: You still have a few weeks left to put aside some money for the 2015 tax year – and then you’ll have a jump on this year’s financial decisions.

Some of these decisions have gotten easier to make. Last year the myIRA, a retirement-for-beginners account was established. If case you want something more tailored to your individual needs, the following may be helpful, particularly for entrepreneurs.

You need to ask “What size fits me best?”

The most common options for business owners are individual retirement accounts (IRAs), solo 401(k)s, and simplified employee pensions (SEPs). Which makes the most sense for you hinges on how much you’re allowed to put away each year; whether you have employees; how high your tax rate is; whether you might need to lay hands on your contributions before you retire; and how old you are. Many allow you to exceed the following limits if you’re at least 50 years old. In all cases, please seek the advice of an investment professional.

If you want to do something right away that counts toward 2015, you have until April 15 if you have not filed your tax return before then, to open an IRA or SEP. If you don’t mind being limited to $5,500 a year, opening an IRA is an easy, quick choice. You can do so with almost any bank or brokerage firm, usually even if you don’t already have an account there. (Some may require a minimum initial deposit.) You can pick individual investments or use the automated portfolio feature at some financial institutions.

If you want to deduct your IRA contributions from your taxes, pick a regular IRA; you’ll pay taxes on your funds when you withdraw them later, not now. A Roth IRA is the opposite: Your contributions are from after-tax dollars, but withdrawals are not taxed when you take them out later. (There’s usually a 10 percent penalty, plus taxes, for withdrawing your regular IRA contributions before you’re 59.5 years old)

If you have more money available to put away, consider a SEP. It’s popular among business owners with no employees, and the self-employed who want to save more. You may contribute as much as 25 percent of your net earnings, up to $53,000. Another option if you’re self-employed or if your spouse is your only employee is a solo 401(k), which allows you to stash the same percentage of earnings and to defer up to $18,000 of your salary annually. If you don’t have employees, you might prefer a SEP, which gives you until April 15 to make contributions for the previous year, and has a percentage contribution formula, which benefits those with higher incomes. A SEP, like a 401(k) and an IRA, can also help lower your tax burden in areas with high state income tax rates.

Finally, if you want an account that covers your employees also, consider a savings incentive match plan for employees (“simple”) IRA. For small businesses with up to 100 workers, a simple IRA is usually free and easier to administer than a traditional 401(k). You and your employees can each put away $12,500 of your salaries; you usually have to match up to 3 percent of your employees’ compensation.

Ultimately, relying on building your business for your retirement funding might pay off – but it might not. Whatever happens you’ll need to retire at some point. Avoid the risk now by making a smart retirement backup plan to your business being your sole retirement funding source.

Let’s keep working on growing your business also – it’s what we’re here for. Call for an appointment. 931-456-4910.

holly

Information for this blog originally appeared in Inc. magazine in Moneywise by Alina Tugend.